Does R&D increase the profit contribution of intangible assets? An exploration of European and American automotive supplierss

Economic theory implies that research and development (R&D) efforts increase firm productivity and ultimately profits. In particular, R&D expenses lead to the development of intangible assets in the form of intellectual property (IP) and these assets command a return that increases overall profits of the firm. This hypothesis is investigated for the North American and European automotive supplier industries. Results indicate that R&D expenses in fact increase both intangible asset levels and their profit contributions. In particular, increases in the R&D expense to sales ratio lead to increases in the profit contribution of intangible assets relative to sales. This indicates that more R&D intensive IP should command higher royalty rates per sales when licensed to third parties and within multinational enterprises alike. Classification-JEL: D24, L20, L62, M21 Keywords: Productivity; Intellectual property; Royalties; MNE; Transfer pricing. Note: The views expressed in this paper are those of the author and do not necessarily reflect those of the institutions he is affiliated with. The author would like to thank seminar participants at the University of East London for helpful comments and suggestions and Keshav Goel for diligent research assistance. Length: 54 pages