Business Intelligence

Research and development, Profits And Firm Value: A Structural Estimation

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Executive Summary

Is the return to private R&D as high as believed? This paper identifies a flaw in the production function approach to estimating the return to R&D. The author provides new estimates based on a structural estimation approach that incorporates uncertainty about the outcome from R&D. The results shed light on the rate of innovation, the impact of an innovation on profits, and the market value of the R&D stock. The parameter estimates imply a mean return to R&D of 3.7-5.5%, much lower than previous values. The analysis also demonstrates the unsuitability of using the return to R&D as a basis for policy decisions on tax subsidies to R&D.

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