R&D Spending and Efficiency in Computer and Pharmaceutical Industries

Abstract

The evolution of high-tech industries in modern times has been profoundly affected by innovations in different forms such as new product designs and new software developments. Research and development (R&D) spending capture the key elements of the dynamic innovation process. Several features of R&D investment by firms are important in the dynamic evolution of an industry. First of all, R&D spending not only generate new knowledge about technical processes and products but also enhance the firm’s capability to improve the stock of existing “knowledge capital.” This is the process of learning that has cumulative impact on industry growth. Second, growth of R&D spending helps in expanding the growth of sales or demand through new product variety and quality improvements. This has often been called economies of scale in demand in the modern theory of hyper-competition analyzed by Sengupta (2004). Third, the R&D investment within a firm has a spillover effect in the industry as a whole. This is because R&D spending yields externalities in the sense that knowledge acquired by one firm spills over to other firms and very often knowledge spread in this way finds new applications both locally and globally and thereby stimulates further innovative activity and R&D intensity in other firms.