R

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RD and productivity in the UK what can firm
level data tell us?
Mark Rogers Harris Manchester College,
Oxford May 2007 NIESR conference mark.rogers_at_
hmc.ox.ac.uk
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Outline

• Issues in RD and productivity
• Whats uniquely testable by firm-level data?
• What data do we have?
• Some empirical results
• Future analysis

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Issues

• Policy concerns over BERD
• Market failures
• RD or knowledge spillovers
• Financial constraints (banks, VC, etc)
• Skilled labour supply constraints (which private
  firms cant solve).
• Competitive conditions
• Macroeconomic conditions
• Technological opportunity

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RD or knowledge spillovers

• Growth theories assume create reason for
  subsidies/grants to RD
• Empirics needed to assess importance
• Industry and firm-level data needed
• Firm-level data allows intra-industry
• Microeconomic theory
• Mergers and JVs can alleviate
• Can have models where too much RD if winner
  take all prize
• Firm-level data can be useful

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Financial constraints?

• Much RD internally funded
• Can analyse cash flow or past profits and RD
• External funds
• Can analyse lending in balance sheet
• If data, check share issues/VC and RD
• both firm-level data
• Analyse rate of return to RD
• Low rates of return implies no constraints
• High rates of return implies constraints
• Firm- or industry-level analysis

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Skilled labour constraints

• Shortage of skilled labour
• Should raise rate of return
• Should also raise wages of scientists, etc
• Industry studies

Macroeconomics

• Exchange rate, interest rate and inflation
  uncertainty
• Country, industry or firm-level

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Competitive conditions

• Conceptually could raise or lower BERD
• Various proxies for competition
• Imports, profits, no. of firms, barriers to
  entry, profit persistence, IVs such as EU or UK
  law changes.
• Firm-level data useful for some of these
• Endogeneity of RD and competition Sutton (1998)
  or Baumol (2002) oligopolies.
• Entry and exit studies
• Activity of SMEs

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Technological opportunity

• Basic science
• University-business links, spin-offs, PhDs
• Firm-level data (origin, location, joint
  patenting)
• Management ability
• Data on science background, MBAs
• IPRs
• Is IP system offering protection?
• Firm-level data can offer some insight

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Data sources

• Financial data (Datastream, Thomson, FAME often
  dont have RD)
• RD Scoreboard from DTI
• Community Innovation Survey
• BERD data at ONS

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Existing studies
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Low RD rate of return in UK?

• Bond, Harhoff and van Reenen, 2003, p.34
• Calculating the implied marginal rates of return
  is extremely hazardous, especially across
  countries. Nevertheless, on the assumption that
  depreciation rates and double counting problems
  are similar across countries, our estimates of
  the gross excess rates of return to RD were
  universally higher in Britain than in Germany.
• Also found cash flow mattered for UK firms
• Implication is that there is supply constraint
• Analysis on large UK firms up to 1996

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Previous estimates of private rate of return to
RD

• US studies (to mid 80s) 13 to 25
• German/French studies 22 to 35
• UK studies (large firms)
• Bond et al (2002) (2X German),
• Wakelin (2001) 26
• Griffith et al (2004) 16 for mean firm
• Rogers (2005) 18 to 30
• No SME studies (to my knowledge)
• Internal rates of return generally high.
  Riskiness of RD

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Rogers (2006), ARD-BERD data

• Rogers (2005) finds similar results for large
  firms. No evidence of high rates of return.
• SME Slightly higher elasticity and RoR. Could
  indicate some constraints?

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Returns to RD
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Low RD opportunities in UK?

• Low RD/GDP currently due to lack of large firms
  in RD intensive sectors (cars, electronics)
  this historical. What happened in 80s and 90s
• UK does have large foreign funded RD
• Science-university-business links
• Service sector City
• Looking ahead
• Constraints of SMEs? Finance, skills, IPRs

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References

• Bond, S., Harhoff, D. and van Reenen, J. (2003).
  'Investment, RD and financial constraints in
  Britain and Germany'. Institute for Fiscal
  Studies Working Paper W99/5.
• Baumol, W. (2002). The free-market innovation
  machine Analyzing the growth miracle of
  capitalism, Princeton, Princeton University
  Press.
• Kafouros, M. (2003). 'Assessing the contribution
  of RD on productivity growth'. Canterbury
  Business School, University of Kent, WP 36.
• Sutton, J. (1998). Technology and market
  structure Theory and history, Cambridge, Mass.,
  The MIT Press.
• Other references in
• Rogers, M. (2006). 'Estimating the impact of RD
  on productivity using the BERD-ARD data'.
  www.dti.gov.uk/economics/ RandDProductivityBERD_Fi
  nal.pdf
• Rogers, M. (2005). 'RD and productivity in the
  UK Evidence from firm-level data in the 1990s'.
  Oxford University, Department of Economics Series
  Ref 255.