The Intangible Divide: Why Do So Few Firms Invest in Innovation?

Abstract

Investments in software, R&D, and advertising have grown rapidly, now approaching half of U.S. private nonresidential investment. Yet just a few hundred firms account for almost all this growth. Most firms, including many large ones, regularly invest little in capitalized software and R&D, and this "intangible divide" has surprisingly deepened as intangible prices have fallen relative to other assets. Using comprehensive US Census microdata, we document these patterns and explore a variety of factors associated with intangible investment. We find that firms invest significantly less in innovation-related intangibles when their rivals invest more. One firm's investment can obsolesce rivals' investments, reducing returns. This negative pecuniary externality contributes to the intangible divide and may imply substantial misallocation.

Keywords: intangibles, R&D, software, innovation, obsolescence

JEL Classification: E22, O31, O32