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Measuring the Returns to R&D: The Depreciation Problem

In: Contributions in Memory of Zvi Griliches

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  • Bronwyn H. Hall

Abstract

Measuring the private returns to R&D requires knowledge of its private depreciation or obsolescence rate, which is inherently variable and responds to competitive pressure. Nevertheless, most of the previous literature has used a constant depreciation rate to construct R&D capital stocks and measure the returns to R&D, a rate usually equal to 15 per cent. In this paper I review the implications of this assumption for the measurement of returns using two different methodologies: one based on the production function and another that uses firm market value to infer returns. Under the assumption that firms choose their R&D investment optimally, that is, marginal expected benefit equals marginal cost, I show that both estimates of returns can be inverted to derive an implied depreciation rate for R&D capital. I then test these ideas on a large unbalanced panel of U.S. manufacturing firms for the years 1974 to 2003. The two methods do not agree, in that the production function approach suggests depreciation rates near zero (or even appreciation) whereas the market value approach implies depreciation rates ranging from 20 to 40 per cent, depending on the period. The concluding section discusses the possible reasons for this funding.

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This chapter was published in:

  • Jacques Mairesse & Manuel Trajtenberg, 2010. "Contributions in Memory of Zvi Griliches," NBER Books, National Bureau of Economic Research, Inc, number mair10-1.
    This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 12239.

    Handle: RePEc:nbr:nberch:12239

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    References

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    1. Ivar Ekeland & James Heckman & Lars Nesheim, 2002. "Identification and estimation of hedonic models," CeMMAP working papers CWP07/02, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
    2. Iain Cockburn & Zvi Griliches, 1987. "Industry Effects and Appropriability Measures in the Stock Markets Valuation of R&D and Patents," NBER Working Papers 2465, National Bureau of Economic Research, Inc.
    3. Louis K. C. Chan, 2001. "The Stock Market Valuation of Research and Development Expenditures," Journal of Finance, American Finance Association, vol. 56(6), pages 2431-2456, December.
    4. James N. Brown & Harvey S. Rosen, 1982. "On the Estimation of Structural Hedonic Price Models," NBER Technical Working Papers 0018, National Bureau of Economic Research, Inc.
    5. Zvi Griliches, 1958. "Research Costs and Social Returns: Hybrid Corn and Related Innovations," Journal of Political Economy, University of Chicago Press, vol. 66, pages 419.
    6. Zvi Griliches & Jacques Mairesse, 1995. "Production Functions: The Search for Identification," Harvard Institute of Economic Research Working Papers 1719, Harvard - Institute of Economic Research.
    7. Zvi Griliches & Bronwyn H. Hall & Ariel Pakes, 1988. "R&D, Patents, and Market Value Revisited: Is There Evidence of A SecondTechnological Opportunity Related Factor?," NBER Working Papers 2624, National Bureau of Economic Research, Inc.
    8. Bosworth, Derek & Rogers, Mark, 2001. "Market Value, R&D and Intellectual Property: An Empirical Analysis of Large Australian Firms," The Economic Record, The Economic Society of Australia, vol. 77(239), pages 323-37, December.
    9. Zvi Griliches, 1980. "Returns to Research and Development Expenditures in the Private Sector," NBER Chapters, in: New Developments in Productivity Measurement, pages 419-462 National Bureau of Economic Research, Inc.
    10. Zvi Griliches, 1984. "Market Value, R&D, and Patents," NBER Chapters, in: R & D, Patents, and Productivity, pages 249-252 National Bureau of Economic Research, Inc.
    11. Chan, Su Han & Martin, John D. & Kensinger, John W., 1990. "Corporate research and development expenditures and share value," Journal of Financial Economics, Elsevier, vol. 26(2), pages 255-276, August.
    12. repec:fth:inseep:9730 is not listed on IDEAS
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