Research and development, profits and firm value: a structural estimation

Missaka Warusawitharana ()

No 2008-52, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: Is the return to private R&D as high as believed? This study identifies a flaw in the production function approach to estimating the return to R&D. I provide 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.

Keywords: Research and development; Rate of return (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ino, nep-ipr, nep-knm and nep-ppm
Date: 2008
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