Review of Industrial Organization 20: 305–322, 2002.
© 2002 Kluwer Academic Publishers. Printed in the Netherlands.
Effects of R&D Spillovers on the Proﬁtability of
and ALAIN ST-PIERRE
Département d’économique, Université de Sherbrooke, Sherbrooke, Qc. Canada, J1H 1H9
Abstract. This cross-section study of a sample of 278 ﬁrms from the COMPUSTAT II database
explores the relationship between a ﬁrm’s proﬁtability and other variables, notably its own R&D
capital, knowledge and market spillovers and appropriability. The proxy for knowledge spillovers is
based on technological distance. Market spillovers are based on a patent input-output matrix. Both
spillover proxies combine information on R&D expenditures and patent counts.
The results do not reject the hypothesis that R&D has a direct, positive effect on proﬁtability, es-
pecially in industries with effective patent protection. Information spillovers affect proﬁts negatively,
market spillovers positively.
Key words: Appropriability, cross-section, manufacturing, proﬁtability, R&D, spillovers, technolo-
Since Arrow (1962) established that the privately owned ﬁrms are likely to under-
invest in R&D and innovation because they are unable to fully appropriate returns
from these activities, technological externalities – or spillovers – have been focus
of a growing number of theoretical and empirical studies. The studies surveyed
by Griliches (1992), Mairesse and Mohnen (1994), and again by Mohnen and
Mairesse (1999) showed a positive association between various R&D spillover
proxies and increased productivity. However, examining the spillover issue from an
Arrowian perspective, Geroski (1995, p. 90) concluded that: “. . . spillovers do not
always (and, perhaps even often) seriously undermine the incentives to innovate”.
Only few empirical studies have addressed the effects of R&D spillovers on proﬁt-
ability. Following the work of Jaffe (1986), Megna and Mueller (1991), Megna and
Klock (1993), Geroski et al. (1993) and Zantout and Tsetsekos (1994), our study
considers in addition to direct effects of R&D also the effects of R&D spillovers
e de Sherbrooke and CIRST (Centre inter-universitaire de recherche sur la science et
la technologie, Montr
Canada Customs and Revenue Agency.