R&D Returns Causality: Absorptive Capacity or Organizational IQ

Anne Marie Knott

Washington University in Saint Louis - John M. Olin Business School

July 20, 2009

Absorptive capacity is the principle that assimilating new knowledge requires prior knowledge. The attendant prescription is to invest more in R&D to derive greater benefit from the R&D of others (spillovers). Empirical tests of R&D productivity typically find absorptive capacity (R&D* rival R&D) to be significant. This result poses a puzzle however: What can a firm conducting 50% of industry R&D learn from a set of firms each conducting 5%? Aren’t the laggard firms merely playing catch-up? Yet if this is so, why is the interaction term significant?

One possible resolution to this puzzle is that the correlation between R&D spending and returns is really about innate ability (IQ) rather than investment behavior (absorptive capacity). In this view the causality between capability and behavior is reversed. It is NOT that firms obtain higher returns by investing more in R&D, it is that some firms have higher returns to R&D, thus they invest more. I conduct an empirical test of the competing views and find, 1) firms differ in the output elasticities of their own R&D (IQ) as well as the elasticities of spillovers from rivals, 2) absorptive capacity becomes insignificant when accounting for that heterogeneity, 3) R&D investment increases with IQ, but 4) R&D investment has no impact on firms ability to benefit from spillovers.

Keywords: abosrptive capacity, R&D, organizational IQ

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Date posted: September 8, 2009  

Suggested Citation

Knott, Anne Marie, R&D Returns Causality: Absorptive Capacity or Organizational IQ (July 20, 2009). Available at SSRN: http://ssrn.com/abstract=1470465 or http://dx.doi.org/10.2139/ssrn.1470465

Contact Information

Anne Marie Knott (Contact Author)
Washington University in Saint Louis - John M. Olin Business School ( email )
One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States
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