Knowledge Cycles and Corporate Investment

Abstract

We examine how firms invest along their knowledge cycles. If investment is only a means to accumulate capital, cycles are irrelevant for the investment-value relation, with the two declining together over cycles. But we argue that investment also creates knowledge—serendipitously—disconnecting it from value. Investment is high early and late in the cycle, its relation with value spikes before new cycles start and declines thereafter. We uncover this specific pattern in the data, identifying new cycles using sharp changes in patents’ citations to prior technologies. Cycles’ length has tripled in recent years, coinciding with concurrent changes in the investment-value relation.

Keywords: Investment, Experimentation, Exploration, Knowledge Capital, Knowledge Cycles, Total $Q$, Intangible Capital

JEL Classification: G31,D83