Does R&D Drive Growth
39 Pages Posted: 22 Jan 2014 Last revised: 7 Mar 2019
Date Written: February 19, 2019
Since at least Penrose and Chandler, we have understood that companies conduct R&D to grow. For the past several years, though, the strategy consulting division of PwC, Strategy&, has produced a report of the top 1,000 R&D firms. Their conclusion is rather surprising—R&D spending doesn’t drive growth. We draw on Romer’s theory of endogenous growth from R&D to understand why. After evaluating three common innovation measures, only one measure, RQ, satisfies the requirements for the R&D productivity construct in Romer’s theory. Based on tests with that measure, we demonstrate that R&D is indeed a driver of growth when R&D productivity is included in the model. Moreover, we show that the Strategy& observation is likely due to the fact the R&D productivity has been declining.
Keywords: R&D, market value, growth, RQ, TFP, patents
JEL Classification: D24, L25, O33
Suggested Citation: Suggested Citation