R&D AND PRODUCTIVITY IN THE UK:EVIDENCE FROM FIRM-LEVEL DATA IN THE 1990s

The UK’s business R&D (BERD) to GDP ratio is low compared to other leading economies,and the ratio has slowly declined over the 1990s. This paper uses data on large UK firms toanalyse the link between R&D and productivity over the 1989-2000 period. Using aproduction function approach, and a sample of up to 719 firms, various different samples andestimators are used to assess the elasticity of, and rate of return to, R&D. The results indicatethat UK returns to R&D are similar to returns in other leading economies. Furthermore, thereturns to R&D have been relatively stable over the 1990s. There is no evidence to suggestthat stock market listed firms, or firms with higher past profitability, have significantlydifferent returns. Overall, the results suggest that the low BERD to GDP ratio in the UK isunlikely to be due to direct financial or human capital constraints (as these imply findingrelatively high rates of return). Instead, the low BERD to GDP ratio appears to reflect low(perceived) opportunities by firms and the inability of firms to manage R&D to generatevalue. The paper provides some, tentative evidence, that high rates of competition in thescience-based sector are associated with low returns to R&D....