In this article we investigate – both conceptually and empirically – the
relationships between three interconnected elements of the Schumpeterian
“engine of progress”: the ability of industries’ R&D efforts to turn out
successful innovations; the ability of innovations to lead to high
entrepreneurial profits; the commitment of industries to invest profits in
further technological efforts. We build a simultaneous three-equation model
– with appropriate lags – and we test it at industry level – for 38
manufacturing and service sectors – on eight European countries over two
time periods from 1994 to 2006. The results show that the model effectively
accounts for the dynamics of European industries.