Advertising affects firms’ innovation and sales, and long-run economic growth

The interaction between advertising and innovation incentives at the firm level can alter aggregate economic measures. When advertising costs decrease, firms reallocate resources away from R&D and towards advertising, hurting long-run economic growth. Laurent Cavenaile and Pau Roldan-Blanco write that understanding the relationship between R&D and advertising might help explain the success of industrial policies aimed at generating economic growth and raising living standards.