Predicting R&D Investment with Ex-ante Productivity

In this article I demonstrate the relationship between research and development expenditure, and rm productivity. Using data envelopment, I construct a measure of the firm-level distance from the industry-wide productivity frontier. Firms ex-ante further from the productivity frontier invest more in R&D. On average, a 1% larger distance from the frontier causes a 0.6%-1.2% increase in the R&D intensity next quarter. The effect is statistically and economically significant