The Value of Innovation : The Interaction of Competition, R&D and Ip

Investigates the stock market valuation of the research anddevelopment (R&D) and intellectual property (IP) activities of quotedcompanies in the United Kingdom. Unlike previous studies, this analysisconsiders the extent to which the stock market's valuation of firm-levelinnovation varies across firms by sector. The classification system proposed byKeith Pavitt is used to define these sectors. Data spanning the period between 1989 and 2002 are used to analyze themarket value of innovative UK firms. Analysis of the data reveals that themarket valuation of R&D, patents and trademarks do vary significantlyacross Pavitt sectors. Further, the stock market appears to place littlevaluation on firms obtaining UK patents, although there is a positive premiumfor patents from the European Patent Office. Several attempts are made toaccount for variations across sectors in market valuations. An analysis usingprofit persistence as a measure of competitive pressure reveals that morecompetitive sectors have a lower R&D market valuation. In the highlycompetitive information-intensive and science-based sectors, higher marketshare raises the valuation of R&D. (SAA)