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20 February 2024

Investment in research and development powering growth in knowledge economy

Firms are increasingly turning to investments in research and advertising to drive growth as the transition to the knowledge economy intensifies, a new study has found.

r&d office

While growth from more traditional capital investment has remained stable over the last 40 years, high-growth firms have achieved faster growth from investment in research and development while large, slow-growth firms have benefitted from greater advertising spend.

These forms of intangible investment, a new study argues, are proving more efficient than tangible investments, such as plant or machinery, in creating growth as firms shift towards the knowledge economy.

The findings were revealed in new research, Tangible and intangible investments and sales growth of US firms, authored by Dr Joel Rabinovich and published in the journal Structural Change and Economic Dynamics.

Dr Rabinovich said: “This research shows evidence of a shift in the way firms are growing in the knowledge economy, with a higher prevalence of intangible investment and a lower contribution of capital expenditures. It also identifies and differentiates between two types of intangible investment: innovative spending, measured by R&D, and brand-building spending, measured by advertising.

“Whereas the former has a positive, increasing-over-time effect for high-growth firms, the latter has a similar effect for all types of firms except for the top decile. Capital expenditures’ contribution, on the other hand, remained stable for all except the top decile for whom it diminished its growth contribution.”

The study examined data from thousands of non-financial firms listed in the United States over four, 10-year periods; from 1979-1988, 1989-1998, 1999-2008, and 2009-2018.

Dr Rabinovich found that while advertising was increasingly important for all types of firms except the top decile in growth distribution, the positive effects of research and development spending became increasingly concentrated in high-growth firms.

Wider research on intangible investment suggests that firms in developed economies are reshaping themselves to focus on innovation, product strategy, and marketing - in general, higher value-added activities that involve intangible investing - while reducing direct ownership of non-core activities such as manufacturing.


You can read the study in full here.

In this story

Joel Rabinovich

Lecturer in International Political Economy