Japanese R&D Profitability: Industry Production Function Estimation Using Panel Data

Hirokazu Yamada and Yuji Nakayama
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Hirokazu Yamada: Osaka Prefecture University, Sakai, Japan
Yuji Nakayama: Osaka Prefecture University, Sakai, Japan

International Journal of Systems and Service-Oriented Engineering (IJSSOE), 2018, vol. 8, issue 2, 16-29

Abstract: This article examines the contribution to profit from research and development (R&D) using industry-level accounting panel data for eight industries in Japan from 1986 to 2012. Problematically, simple least-squares regression estimation of production functions, where the authors specify sales or value-added as the explained variable and investment in R&D as the explanatory variable, involve endogeneity. Two possible ways of addressing this are the instrumental variables method and another that utilizes the orthogonality between error terms and appropriately time-lagged explanatory variables. The authors compare how both these methods eliminate endogeneity in the estimated production function and thus improve the accuracy of estimates of the rate of return on R&D. These findings thus contribute to the managerial decision-making process on R&D strategy by providing insights into the precise contribution of firm R&D to profit.

Date: 2018
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Persistent link: https://EconPapers.repec.org/RePEc:igg:jssoe0:v:8:y:2018:i:2:p:16-29

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