The effects of the limited exhaustibility of knowledge on firm size and the direction of technological change

The new knowledge intensive direction of technological change is magnified at the firm level by the limited exhaustibility of knowledge. This limited exhaustibility triggers cumulability and extensibility for which the larger the firm, the lower the knowledge generation costs from using a larger stock of existing knowledge, and the lower the knowledge exploitation costs related to a larger output based on use of the same piece of knowledge. The consequences for the direction of technological change are twofold. First, the larger the firm size, the larger the share of intangible capital in total capital. Second, the output elasticity of intangible capital increases with the size of the firm. We test our hypotheses on data on US listed companies over the period 1977–2016. The results of ordinary least squares, two-stage least squares and production function estimations confirm our theoretical expectations.