R&D Spillovers and Firm Value : The Absorptive Capacity Channel

This paper examines the channel through which innovation fosters growth. It focuses on the firm-level ability to utilize existing external knowledge: absorptive capacity (AC). This paper contributes in identifying a proxy for absorptive capacity. I measure AC as a firm’s ability to utilize peer R\&D, to enhance its own productivity. I find the measures of AC along with the spillovers are related to the utilization of existing external knowledge and the creation of quality inventions in the future, using citation data. The paper shows that firm value, Tobin’s q, is positively related to firm’s AC. I also examine the effect of knowledge spillovers on R\&D intensity and find that it is different for high-tech sectors and non-high-tech sectors. Non-high-tech sectors have the incentive to invest more in R\&D to take advantage of the existing knowledge and the firms that are in the high-tech industries strategically utilize their absorptive capacity to substitute their own R\&D with existing knowledge