THE EFFECTS OF R&D AND ITS DIFFERENT TYPES ON FIRM PRODUCTIVITY: EVIDENCE FROM CHINA

Abstract

This paper employs the Olley and Pakes [(1996). The dynamics of productivity in the telecommunications equipment industry. Econometrica, 64(6), 1263–1297.] method and the generalised propensity score (GPS) methodology to estimate the effects of R&D and its different types, including research activity and development activity, on productivity. Our research sample is an unbalanced panel data consisting of 1808 Chinese listed manufacturing firms from the period 2006–2015. Our analysis reveals how R&D and its different types impact firm productivity: (1) there exists an S-shaped relationship between firm R&D intensity and productivity, which implies the existence of the threshold and diminishing marginal return of R&D for productivity growth. Due to the unbalanced composition of R&D in China, after R&D intensity reaches a critical level (around 50%) a negative marginal effect of R&D presents; (2) an increase of research intensity can improve firm productivity. However, research intensity reaches a saturation point (around 65%) beyond which firm productivity plateaus; (3) there exists an inverted U-shaped relationship between firm development intensity and productivity. The marginal effect of development on firm productivity is negative when development intensity is over 28%. Our empirical evidence implies that firms need to optimise the composition of R&D expenditure in order to realise sustained productivity growth.

General Purpose and Focused Invention, Market Value, and Productivity

“…We also show that this premium is associated with an opportunity cost in terms of foregone market value, which would have been realized with a more focused strategy. These results, along with recent results that study the strategic choice of basic and applied research (Guo et al, 2022;Arora et al, 2021), send to the idea of balancing focused and general purpose inventive activity at the firm level. Our results provide valuations in terms of market values and productivity that can guide formalizations and decision making in this context.…”

“…Dean et al (2023) discuss and demonstrate the effect of organizational and product complexity on a firm's ability to translate basic research into market success. Guo et al (2022) examine the strategic balance between basic research and applied development, finding that corporate basic research increases the productivity of the firm up to a saturation point (about 65% research intensity of R&D) and plateaus afterwards. They also report an inverted-U type relationship between applied development intensity and productivity, peaking at 28% intensity.…”