Measuring the Returns of Research and Development: An Empirical Study of the German Manufacturing Sector over 45 Years

Motivated by recent statistics that show significant growth in labor productivity, this paper seeks to analyze the relationship between domestic R&D, knowledge stock and productivity dynamics. Time series data of the German manufacturing industry is used to estimate a variable cost function with the stock of knowledge being dependent upon current and past R&D spending. The estimates indicate that 50 percent of the effects of R&D on the knowledge stock appear within four years. However, the rate of return on R&D are shown to be drastically declining; recent rates of return on R&D are estimated to have reached an all-time low spanning the last 45 years. Current yields of R&D are only one third compared to the sixties. In conclusion, though the productivity slowdown of the seventies seems to have been overcome, this is not attributed to R&D investments.