Technological Opportunity and Spillovers of R&D: Evidence from Firms' Patents, Profits and Market Value

This paper presents evidence that firms' patents, profits and market value are systematically related to thetechnological position of firms' research programs. Further, firms are seen to move in technology space in response to the pattern of contemporaneous profits at different positions. These movements tend to erode excess returns.Spillovers of R&D are modelled by examining whether the R&D of neighboring firms in technology space has an observable impact on the firm's R&D success. Firms whose neighbors do much R&D produce more patents per dollar of their own R&D,with a positive interaction that gives high R&D firms the largest benefit from spillovers. In terms of profit and market value, however, their are both positive and negative effects of nearby firms' R&D. The net effect is positive for high R&D firms, but firms with R&D about one standard deviation below the mean are made worse off overall by the R&D of others.