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Profits, R&D and Innovation: a Model and a Test

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In this article we investigate both conceptually and empirically the relationship between three interconnected elements of the Schumpeterian engine of progress: the ability of industries R&D efforts to turn out successful innovations; the ability of innovations to lead to high entrepreneurial profits; the commitment of industries to invest profits in further technological efforts. We build a simultaneous three-equation model with appropriate lags and we test it at industry level for 38 manufacturing and service sectors on eight European countries over two time periods from 1994 to 2006. The results show that the model effectively accounts for the dynamics of European industries. Our main results are that demand and innovation are the key determinants for firm profitability; second that both technology adoption and R&D concur to improve innovative performance; third, that R&D is path dependent and is negatively related to the distance from the frontier. Finally, manufacturing and services show similar behaviour.

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  • Francesco Bogliacino & Mario Pianta, 2010. "Profits, R&D and Innovation: a Model and a Test," JRC Working Papers on Corporate R&D and Innovation 2010-05, Joint Research Centre.
    • Handle: RePEc:ipt:wpaper:201005
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    1. Wakelin, Katharine, 2001. "Productivity growth and R&D expenditure in UK manufacturing firms," Research Policy, Elsevier, vol. 30(7), pages 1079-1090, August.
    2. Evangelista, Rinaldo & Savona, Maria, 2003. "Innovation, employment and skills in services. Firm and sectoral evidence," Structural Change and Economic Dynamics, Elsevier, vol. 14(4), pages 449-474, December.
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    More about this item

    Keywords

    Profits; R&D; Innovation; System Two Stages Least Squares;
    All these keywords.

    JEL classification:

    • L6 - Industrial Organization - - Industry Studies: Manufacturing
    • L8 - Industrial Organization - - Industry Studies: Services
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes
    • O52 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Europe

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