An empirical analysis of firm process and product patenting

This paper presents an empriical study of the determinants of firm patenting. Since industrial research and development (R&D) encompasses a variety of activities, this study distinguishes between patents on process innovations and patents on product innovations. The property rights provided by a patent may differ between process and product patents, which suggests that the determinants of process innovations and product innovations may difer as well.

Several recent studies have distinguished between research directed toward process innovations and research directed toward product innovations. Scherer (1983a) included measures of process R&D spending and product R&D spending in regressions for inter-industry differences in productivity growth. Link and Lunn (1984) found that the returns to process-related R&D activity exceed the returns to product-related R&D activity. Link (1982) found inter-firm differences in the allocation of R&D spending for process innovations and product innovations. Lunn (1986) found differences in the determinants, as well as the effects, of process patenting and product patenting at the industry level. This paper examines whether the determinants of product and process patenting differ at the firm level.     

Firm size and types of innovation

We propose a general theory of innovation that illustrates the relative benefits of performing process versus product R&D when firm size is endogenous. A firm's size, scope, and R&D portfolio are shown to reflect the same underlying characteristic of the firm, namely manufacturing efficiency. We demonstrate that efficient firms become larger, have greater scope, and perform more of both process and product R&D. In light of decreasing returns to R&D, this implies small firms obtain more product innovations per dollar of R&D than large firms, which is consistent with evidence we present that small firms are more innovative than large firms as they obtain more patent counts and citations per dollar of R&D.     

Research and development and labour productivity: do high-tech firms exhibit labour- or capital-saving technical change?

Employment and output in the advanced technology sectors have generally exhibited above-average growth for more than two decades. While this industry accounts for a relatively small share of total employment, the majority of private sector research and development (R&D) expenditures in the US is concentrated within seven sub-sectors. However, little attention has been paid as to whether high-tech productivity exhibits Hicksian capital or labour ‘savings’ bias or tendency to displace either factor input over time. Biased technical change can occur as economies transition between growth regimes. An augmented production function is employed to analyse the additional impact of R&D activity on firm-level labour productivity. A panel data set comprised of high-tech firms located across the advanced economies, China and India from 1990 to 2013 is used in the analysis. Labour-saving technical change was present across the advanced technology sectors and most countries. The expanded models of labour productivity that used fixed effects with lagged regressors confirmed the prior results as well as finding that R&D per employee, relative R&D intensity and firm market share contribute to firm-level labour productivity growth across countries and sectors. Additional support was found for diminishing returns to scale but not for R&D spillover effects.     

Technology Strategy And Product Diversity

This paper considers a three-stage game of a differentiated oligopoly: firms first make their entry decisions, then they choose production technologies and in the third stage of the game they decide product prices. The technology choice can be understood as selecting one from a pool of those recently available as well as developing a new technology through innovative activities. The resulting market equilibrium is then compared with the social optimum. The main conclusions are that a monopolistically competitive market will typically undersupply both product variety and production scale. R&D competition in a free entry differentiated oligopoly will lead to insufficient R&D investment at firm and industry levels.     

A simple theory and evidence on the determinants of firm R&D

This paper derives a simple, but informative, model of firm R&D to figure out key factors that determine firm R&D effort. The model suggests a demand-pull, technology-push theory of R&D by showing that a firm's profit-maximizing R&D expenditure is determined jointly by both demand-side factors and technology-side factors. The former includes demand size (firm sales) and consumer preference over quality and price and the latter includes R&D cost structure or the production-cost effect of product R&D and firm-specific technological competence. In addition, the model shows that other things being equal, the stock of exogenous technological knowledge, including the firm's previously accumulated technological knowledge, relevant to current R&D which is negatively related with current R&D effort. An empirical analysis of firm R&D intensities and technological capabilities of more than 1600 firms in nine industries across six countries provides supportive evidence for the theory. Further, the theory implies that R&D intensity or the R&D-to-sales ratio is independent of firm size unless firm size affects technological competence and that given consumer preference and R&D cost structure facing all firms in the same industry, the distribution of firm-specific technological competence among firms determines the distribution of firm R&D intensities within the industry.     

Technological opportunity and the growth of knowledge: A Schumpeterian approach to measurement

A model of endogenous growth, based on Schumpeter's notion of trustified capitalism, is developed and applied to firm-level data for the period 1973–1991. The model relates the market value of a firm to its current profits and to its R&D expenditures. The relationship depends upon the expected rate of knowledge growth, the expected value of an innovation and the elasticity of the R&D production function. Over the sample period, investors expected knowledge to grow at an average rate of 5 percent, a measure which reflects both process innovations and new product discoveries. Elasticities of the R&D production functions are estimated for thirteen industry groups and interpreted as measures of technological opportunity. There is no evidence of secular decline in technological opportunity over the sample period, but there is some evidence of diminishing returns to R&D intensity. Variations in technological opportunity over time are not correlated across industries. In contrast, the expected rates of knowledge growth at the industry level are highly correlated with the aggregate expected rate.     

Research and development and trade policies for product innovation in the presence of foreign competition

This paper examines two policy instruments — a matching grant and import tariffs — for encouraging research and development (R&D) in product innovation by a domestic firm when it faces foreign competition. We do so by developing a theoretical model of product innovation where R&D effort is endogenous and its outcome uncertain. We examine the effects of a reduction in import tariffs on private expenditure on R&D, on public support for such R&D, and on total R&D expenditure. We find that in response to a reduction in import tariffs, the domestic firm always reduces its private R&D investments, but the total level of R&D expenditure (i.e., including public support) might go up depending on the level of tariffs. In particular, we find that it will go up if the initial level of tariff is higher than a critical level. When tariff is endogenous, we find that the socially optimal level of tariffs is positive. One finding that is of particular interest is that supporting private attempts to product innovate in the form of a matching grant program leads to a socially optimal level of product R&D.     

Demand Shift Effect of R&;D and the R&;D Organization

We assume that R&D investment by a firm improves the quality of the product. This is reflected in an upward shift of the demand function. Firms can do R&D either independently or cooperatively. We show that cooperative research strictly dominates non-cooperative research, both in terms of profitability and welfare. Also, R&D investment by each firm under cooperative research is larger for a relatively high R&D output elasticity. The higher the degree of product differentiation and/or larger the R&D output elasticity is, the larger the increase in quality level under cooperative research, compared to non-cooperative research, will be.     

Process R&;D and Product Line Deletion by a Multiproduct Monopolist

Relative to single-product firms, a multiproduct monopolist can internalize the negative externalities of its R&D investments (the ``cannibalization effect') in two ways: (1) To lower R&D investment for each product; and (2) To delete some of its product lines so as to enlarge the market size for the remaining lines. It is shown that line deletion is profitable if products are close substitutes. If products are not close substitutes, the multiproduct monopolist keeps all product lines and invests less in cost-reducing R&D than single-product firms engaging in Cournot competition with product differentiation. However, it invests more in R&D than single-product firms if there are significant economies of scope in R&D, or if the oligopolistic firms can cooperate in their R&D decisions.      

High-growth versus declining firms: the differential impact of human capital and R&D

We provide evidence that both human capital and R&D increase the likelihood that a firm will be a high-growth firm in the industry. However, different from human capital, being an R&D active firm also increases the probability of substantial decline or failure, underscoring the risky nature of innovation. Quantile regression results show that, different from R&D, human capital is growth-enhancing for all firms, hence also those located in the lower quantiles of the distribution of growth rates across firms.     

A computational analysis of R&D support programs

We compare two common government R&D support programs, R&D tax credits and direct R&D grants. To study their effectiveness and the extent to which their design matters, we analyze these programs within a dynamic equilibrium model of imperfectly competitive industries. Adopting comprehensive welfare measures that take into account government, producer and consumer surpluses, we find that both schemes exhibit positive social returns. Mid-range R&D-intensive sectors exhibit higher social returns than either high or low R&D-intensive sectors. Both incentive schemes generate positive measures of R&D input additionality of magnitudes consistent with empirical R&D research. However, R&D grants that require firms to allocate subsidy funds to R&D spur less R&D than a more flexible R&D tax credit. Subsidy schemes can even induce competing firms to over-spend on R&D, generating negative producer surplus and possibly negative social returns.     

Industry R&D intensity distributions: regularities and underlying determinants

This paper aims to examine the nature of the distributions of firm R&D intensities within industries and explore the factors that underlie the industry R&D intensity distributions. In particular, following the seminal study by Cohen and Klepper (1992) and using some new and rich data on firm R&D intensities for seven industries across six countries, this study examines the regularities in the industry R&D intensity distributions and demonstrates, based on a simple model of firm R&D, that the industry R&D intensity distributions are governed by the distributions of technological competence, a measure of firm R&D productivity, which corresponds to the notion of the “unobserved R&D-related capabilities” suggested by Cohen and Klepper (1992). This study found that firm R&D intensities within industries are lognormally distributed, displaying a strikingly regular pattern across industries, that the industry distributions of the levels of technological competence are also lognormal, and that, based on the formal model of firm R&D and the notion of the unobserved R&D-related capabilities, the distribution of firm technological competence within an industry underlies the industry's firm R&D intensity distribution.     

Too little or too much R&D?

According to the first generation models of endogenous growth based on expanding product variety, the market economy unambiguously generates too little R&D. Later, by disentangling returns to specialization from the market power parameter, it was shown that with sufficiently low returns to specialization too much R&D can occur. The present paper takes a step further, disentangling the market power parameter from the capital share in final output. At a theoretical level this helps finding too much R&D as well. On the other hand, in view of the empirically realistic order of magnitude between the parameters, disentangling market power and capital share tends to diminish the scope for excess R&D. Finally, by differentiating between net and gross returns to specialization we demonstrate what drives the differing inefficiency results in this literature.     

Innovation,product development and market value: evidence from the biotechnology industryinnovation in biotechnology industry

The subject of the paper is financial valuation of firm's knowledge assets and returns to innovation in the biotechnology industry, where such assets appear to play key role in the commercial success of a product. The biotechnology industry is extremely research-intensive, and successful R&D drives profitability. Further, the pharmaceutical product development advances in a number of well-defined stages that allow relatively precise measurement of product development outcomes. The study reports recent biotechnology R&D statistics, and provides estimates of private returns to innovation and product development activity in the biotechnology industry. The conclusions indicate that the financial market recognizes the value of drugs in product development stage, as it expects the innovative knowledge embodied in drug development projects to become marketable products in the future.     

R&;D and productivity: using UK firm-level data to inform policy

The UK’s business R&D (BERD) to GDP ratio is low compared to other leading economies, and the ratio has declined over the 1990s. This paper uses data on 719 large UK firms to analyse the link between R&D and productivity during 1989–2000. The results indicate that UK returns to R&D are similar to returns in other leading economies and have been relatively stable over the 1990s. The analysis suggests that the low BERD to GDP ratio in the UK is unlikely to be due to direct financial or human capital constraints (as these imply finding relatively high rates of return).     

Trade and the Transmission of Technology

This paper integrates earlier studies on the link of productivity and research and development (R&D) in different industries of a closed economy with the more recent emphasis on R&D-driven growth and international trade in open economies. In this framework, technology in the form of product designs is transmitted to other industries, both domestically as well as internationally, through trade in differentiated intermediate goods. I present empirical results based on a new industry-level data set that covers more than 65 percent of the worlds manufacturing output and most of the worlds R&D expenditures between 1970 and 1991. The analysis considers productivity effects from R&D in the domestic industry itself, from R&D in other domestic industries, as well as in the same and other foreign industries. I estimate strong productivity effects both from own R&D spending and R&D conducted elsewhere. The contribution of R&D in the industry itself is about 50 percent in this sample. Domestic R&D in other industries is the source of 30 percent of the productivity increases, and the remaining 20 percent are due to R&D expenditures in foreign industries.     

Property rights protection and corporate R&D: Evidence from China

Following the recent literature on institutions and economic growth, we examine the effects of property rights protection on corporate R&D. Using a unique 2003 World Bank survey of over 2400 firms in 18 Chinese cities, we obtain the following findings: (1) property rights protection is positively and significantly related to corporate R&D activity (for both process and product R&D); (2) government services and helping hand are conducive to corporate R&D, while informal payments to government officials are not; and (3) government ownership of firms and direct appointment of CEOs are negatively associated with corporate R&D activities. We also find that corporate R&D is positively related to firm size, and access to finance, but negatively related to product market competition and firm age.     

Do R&D expenditures matter more than those of marketing to company performance? The moderating role of industry characteristics and investment density

Confronting competitive environment, enterprises differentiate their product by promoting their R&D or marketing capacities. Scholars have verified that there is a direct relationship and a deferred effect between R&D expenditures and firm performance, but that there exists an inconsistency between marketing expenditures and firm performance. However, previous studies have neglected to analyse and compare the impact of corporate R&D and marketing investment on performance, and also ignored the moderating effects of different industry characteristics and investment densities. The study attempts to fill the gap by constructing a model to accommodate all these factors. The empirical results indicate that R&D and marketing expenditures have a positive impact on enterprise operating performance, and that there is a longer deferred effect in R&D expenditures than in marketing expenditures. By investing in R&D expenditures, manufacturing enterprises can increase their performance more than in service enterprises, and electronic enterprises can improve their performance compared with other types of firms. Finally, investments with higher R&D density can result in a higher performance.     

R&D productivity: A global multi-industry comparison

This study considers the productivity of R&D expenditures on an international and multi-industry basis. Using 1992 data reported by Business Week on 117 companies in the United States, Europe, and Japan, we examined two measures of innovative output, patents and impact-adjusted patents, in relationship to R&D spending. Our results clearly show a decreasing returns to scale of R&D expenditure. Although this pattern holds true regardless of industry or global region, the level of return and rate of decreasing returns vary by both industry and international region.     

R&D subsidies in a model of growth with dynamic market structure

This paper presents the effects of an R&D subsidy in a Schumpeterian general equilibrium model with rich industry dynamics. R&D subsidies raise the long-run growth rate, but they also raise the level of industry concentration. In the model firms compete for market share through process R&D endogenously determining the market structure within and across industries. Endogeneity of the market structure allows for analysis of changes in the moments of the firm size distribution in response to policy. R&D subsidies primarily benefit large incumbent firms who increase their innovation rates creating a greater technological barrier to entry. Concentration increases with fewer firms and a higher variance in the market shares. In general equilibrium, the greater distortions in the product market cause the wage rate to fall which leads to increased turnover rates. In addition, the analysis demonstrates that the model captures a large number of empirical regularities described in the industrial organization literature, but absent from most endogenous growth models. These features, such as entering firms are small relative to incumbents, the hazard rate of exit is negatively related to firm size, and large firms spend more on R&D than small firms play important roles in understanding the impact of R&D subsidies on the economy.