Predicting R&D investment with exante productivity

Abstract

In this article I demonstrate the relationship between research and development expenditure and firm productivity. Using data envelopment, I construct a measure of the firm-level distance from the industry-wide productivity frontier. Firms ex ante further from the productivity frontier invest more in R&D. On average, a 1% larger distance from the frontier causes a 0.6% to 1.2% increase in the R&D intensity next quarter. The effect is statistically and economically significant.

Keywords:

• productivity frontier
• research and development
• data envelopment
• forecasting

JEL Classification:

• C14
• E27

Acknowledgements

Financial support from the Dean Witter Foundation and the Fisher Center for Real Estate and Urban Economics is gratefully acknowledged. I would like to thank Martin Lettau, Richard Stanton, Adam Szeidl and seminar participants at University of California, Berkeley for helpful comments and suggestions.