Do Inventions Drive Firm Growth

Abstract

R&D generates two outputs: inventions and knowledge. While the prevailing view is that inventions drive growth, a fundamental assumption behind patent policy as well as growth theory, is that knowledge accumulation drives growth. While the distinction between inventions and knowledge may be inconsequential at the economy-level, it becomes important at the firm level, because firms can outsource their R&D. When they do so, inventions and knowledge are no longer co-located: inventions accrue to the funding firm, but knowledge accumulates at the performing firm. Thus R&D outsourcing presents both the need and the means to determine whether inventions or knowledge drives growth. To examine that, I separately characterize the output elasticities of firms’ internal R&D and outsourced R&D. By comparing the two, I find that inventions comprise 0.8% of growth from R&D, while knowledge accumulation comprises 99.2%. Beyond the theoretical contribution that growth from R&D stems principally from knowledge accumulation rather than inventions, this research has practical implications as well. It suggests that the six-fold increase in R&D outsourcing has contributed to the decline in firms’ R&D productivity. Accordingly, it may be possible to restore R&D productivity by reducing the share of R&D that is outsourced.

Keywords: R&D, outsourcing, productivity, growth

JEL Classification: O32, L25