A Structural Empirical Model of R&D, Firm Heterogeneity, and Industry Evolution*

This article develops and estimates an industry equilibrium model of the Korean electric motor industry from 1991 to 1996. Plant‐level decisions on R&D, physical capital investment, entry, and exit are integrated in a dynamic setting with knowledge spillovers. We apply the novel approximation of oblivious equilibrium to estimate the R&D cost, magnitude of knowledge spillovers, adjustment costs of physical investment, and plant scrap value distribution. Knowledge spillovers are essential to explaining the firm‐level productivity evolution and the equilibrium market configuration. A R&D subsidy maximizes industry output and is broadly consistent with a past policy initiative of the Korean government.