BPEA | 1993: Microeconomics 2

Industrial Research during the 1980s: Did the Rate of Return Fall?

Bronwyn H. Hall
Bronwyn Hall
Bronwyn H. Hall University of California, Berkeley

Microeconomics 2, 1993

THIS PAPER IS MOTIVATED by two recent empirical findings about the returns to industrial research and development(R&D) at the firm level. First,t he stock market value of R&D spending relative to ordinary capital investment in U.S. manufacturing firms fell precipitously during the 1980s. Second, the contribution of R&D to productivity in these same firms apparently declined from an elasticity of about 0.10-0.15 during the 1960s and 1970S to around 0.02 during the 1980s. Taken together, these findings suggest that something has happened to the marginal private rate of return to industrial R&D during the recent past. The question is, what? This paper explores these prior findings in greater detail in an effort to understand what factors are causing them and to ascertain the pervasiveness of this apparent decline in R&D productivity.