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R&D and Market Value: Appropriability vs. Preemption

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  • Nagaoka, Sadao

Abstract

The recent empirical studies on innovation and market value suggest that R&D has a strong complementarity with market share in the market valuation of firms. Blundell, Griffith and Reenen (1999) argue that it represents the strategic preemptive effect, while Hall and Vopel (1997) suggest a Schumpeterian reason (the cost of financing R&D is lower for large firms). The theoretical framework of these studies is the classical work by Griliches (1981), which postulates that the market value of firm is given by the sum of the values of physical capital and R&D capital with respective multipliers. However, non-rivalry in using new knowledge within a firm makes this framework highly questionable. This paper examines the nexus between R&D and market value, based on a simple but new structural model. Major findings are the following. First, the new model shows that the market evaluation of R&D may well be high for a firm with a large market share, simply due to its appropriability advantage. Second, our estimation based on the data of the Japanese firms shows that the new specification performs better. Third, it shows that there is no statistical support for the prevalence of preemption effect.

Suggested Citation

  • Nagaoka, Sadao, 2004. "R&D and Market Value: Appropriability vs. Preemption," IIR Working Paper 04-03, Institute of Innovation Research, Hitotsubashi University.
  • Handle: RePEc:hit:iirwps:04-03
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    File URL: http://hermes-ir.lib.hit-u.ac.jp/rs/bitstream/10086/15957/1/070iirWP04-03.pdf
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    Keywords

    R&D; market value; appropriability; preemption;

    JEL classification:

    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
    • O32 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Management of Technological Innovation and R&D

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