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Firm Performance and Investment in R&D and Intellectual Property

  • Mark Rogers

    (Harris Manchester College, Oxford and Melbourne Institute of Applied Economic and Social Research, The University of Melbourne)

This paper analyses the relationship between innovation - proxied by Research and Development (R&D), patent and trade mark activity - and profitability in a panel of Australian firms (1995 to 1998). Special attention is given to assessing the nature of competitive conditions faced by different firms, as the nature of competition is likely to affect the returns to innovation. The hypothesis is that lower levels of competition will imply higher returns to innovation. To allow for a time lag time before any return to innovation, the market value of the firms is used as a proxy for expected future profits. The results give some support for the main hypothesis: the market's valuation of R&D activity is higher in industries where competition is lower. However, the paper highlights the difficulty in assessing competitive conditions and finds a number of results that challenge the simple hypothesis.

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Paper provided by Melbourne Institute of Applied Economic and Social Research, The University of Melbourne in its series Melbourne Institute Working Paper Series with number wp2002n15.

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Length: 27 pages
Date of creation: Aug 2002
Date of revision:
Handle: RePEc:iae:iaewps:wp2002n15
Contact details of provider: Postal: Melbourne Institute of Applied Economic and Social Research, The University of Melbourne, Victoria 3010 Australia
Phone: +61 3 8344 2100
Fax: +61 3 8344 2111
Web page: http://www.melbourneinstitute.com/
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  1. Lev, Baruch & Sougiannis, Theodore, 1996. "The capitalization, amortization, and value-relevance of R&D," Journal of Accounting and Economics, Elsevier, vol. 21(1), pages 107-138, February.
  2. Griliches, Zvi, 1981. "Market value, R&D, and patents," Economics Letters, Elsevier, vol. 7(2), pages 183-187.
  3. Waring, Geoffrey F, 1996. "Industry Differences in the Persistence of Firm-Specific Returns," American Economic Review, American Economic Association, vol. 86(5), pages 1253-65, December.
  4. Nickell, Stephen J, 1981. "Biases in Dynamic Models with Fixed Effects," Econometrica, Econometric Society, vol. 49(6), pages 1417-26, November.
  5. Glen, Jack & Lee, Kevin & Singh, Ajit, 2001. "Persistence of profitability and competition in emerging markets," Economics Letters, Elsevier, vol. 72(2), pages 247-253, August.
  6. Henry G. Grabowksi & Dennis C. Mueller, 1978. "Industrial Research and Development, Intangible Capital Stocks, and Firm Profit Rates," Bell Journal of Economics, The RAND Corporation, vol. 9(2), pages 328-343, Autumn.
  7. Kamien, Morton I & Schwartz, Nancy L, 1976. "On the Degree of Rivalry for Maximum Innovative Activity," The Quarterly Journal of Economics, MIT Press, vol. 90(2), pages 245-60, May.
  8. Loury, Glenn C, 1979. "Market Structure and Innovation," The Quarterly Journal of Economics, MIT Press, vol. 93(3), pages 395-410, August.
  9. Goddard, J. A. & Wilson, J. O. S., 1999. "The persistence of profit: a new empirical interpretation," International Journal of Industrial Organization, Elsevier, vol. 17(5), pages 663-687, July.
  10. Boone, Jan, 2001. "Intensity of competition and the incentive to innovate," International Journal of Industrial Organization, Elsevier, vol. 19(5), pages 705-726, April.
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