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

Author

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  • James Bessen
  • Xiupeng Wang

Abstract

Investments in software, R&D, and advertising have surged, nearing half of U.S. private nonresidential investment. Yet just a few hundred firms dominate this growth. Most firms, including large ones, regularly invest little in capitalized software and R&D, widening this “intangible divide” despite falling intangible prices. Using comprehensive US Census microdata, we document these patterns and explore 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 worsens the intangible divide, potentially leading to significant misallocation.

Suggested Citation

  • James Bessen & Xiupeng Wang, 2025. "The Intangible Divide: Why Do So Few Firms Invest in Innovation?," Working Papers 25-15, Center for Economic Studies, U.S. Census Bureau.
    • Handle: RePEc:cen:wpaper:25-15
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    File URL: https://www2.census.gov/library/working-papers/2025/adrm/ces/CES-WP-25-15.pdf
    File Function: First version, 2025
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    More about this item

    Keywords

    intangibles; R&D; software; innovation; obsolescence;
    All these keywords.

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • O32 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Management of Technological Innovation and R&D

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