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This work considers structural models of industry dynamics, namely models of firm behaviour that allow for R&D, heterogeneity among firms, idiosyncratic sources of uncertainty, and discrete outcomes (Jovanovic (1982) and Ericson and Pakes (1995)). Secondly, we adapt the Ericson and Pakes (1995) model to an environment with both physical-capital and knowledge-capital investments. The firms make entry, exit, and investment decisions each period and improve their productivity as a result of their own investments in knowledge capital. Furthermore, there is a technological spill-over from more productive to less productive firms.