Firm performance and investment in R&D and intellectual property

ISBN 0734015399, MIWP No. 15/02. ISSN 13284991.This paper analyses the relationship between innovation - proxied by Research and Development (R&D), patent and trade mark activity - and profitability in a panel of Australian firms (1995 to 1998). Special attention is given to assessing the nature of competitive conditions faced by different firms, as the nature of competition is likely to affect the returns to innovation. The hypothesis is that lower levels of competition will imply higher returns to innovation. To allow for a time lag time before any return to innovation, the market value of the firms is used as a proxy for expected future profits. The results give some support for the main hypothesis: the market's valuation of R&D activity is higher in industries where competition is lower. However, the paper highlights the difficulty in assessing competitive conditions and finds a number of results that challenge the simple hypothesis