Types of R&D investment and firm productivity: UK evidence on heterogeneity and complementarity in rates of return

Existing evidence on the impact of R&D on productivity is heterogenous and does not address the question of whether different types of R&D are complements or substitutes. The aim of this research is to open the R&D black box by providing fresh insights about how different R&D types affect productivity in different industrial and technological contexts in the UK. The model adopted allows for non-linearities between R&D and productivity and interactions between R&D types. The analysis makes use of micro data from the Office of National Statistics, comprising 8284 firms from 1998 to 2012. The results show evidence of diminishing marginal returns to total R&D. This concave relationship also holds for intramural R&D, applied/experimental R&D and private R&D. These findings suggest that studies which do not allow for non-linear relationships between R&D and productivity could suffer from specification bias. The results also indicate complementarity between intramural and extramural R&D and between basic and applied/experimental research. Returns to publicly funded R&D are insignificant and there is neither complementarity nor substitution between publicly and privately funded R&D. The findings strengthen the case for modelling the sources of heterogeneity explicitly by taking into account non-linearities and interactions between the different R&D types and productivity.