Returns to R&D

R&D is generally modeled as a stock of knowledge resulting from the accumulation of past R&D expenditure that enters as a factor of production in an extended production function. It can also be seen as an input in a production function of knowledge whose output can be measured by patents, new products or new processes. R&D then affects productivity in an indirect way increasing the choice or the quality of products. R&D can also be conceived as attempts to improve technologies and productivity with an uncertainty rate of success. Returns to R&D may vary depending on the sectors, the level of development, and the opportunity factor. Econometric estimates may depend on whether they are based on cross-sectional or time-series variation in the data. R&D can generate spillover effects by creating or destroying economic rents elsewhere in the economy or by transmitting knowledge to other firms. R&D spillovers play an essential role in endogenous growth models.