In a multisector model with endogenous knowledge generation we find that long run differences in sectoral productivity growth are mainly driven by receptivity — the extent to which firm research benefits from prior knowledge regardless of the source. R&D intensity also depends on appropriability — the fraction of receptivity that accrues from the firm’s own stock of knowledge. We show that optimal R&D subsidies should target sectors with higher receptivity but lower appropriability. In patent data for 14 US industries appropriability varies less than receptivity, so receptivity is the main factor behind differences in industry TFP growth rates and R&D intensities
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