Diminishing Research Quotient: Does Capital Availability and Labor Productivity Crowd out R&D Productivity?

Abstract

This research documents the diminishing research quotient proposed by Knott and Vieregger (2018) from 1975 to 2015. In the United States, per dollar increase on the research and development (R&D) activities expenditure generated $0.19 in firm revenue in 1975, and $0.09 in 2015. Presented in this paper is the argument that the decline in R&D elasticity of revenue is due to the crowding out results of ineffectiveness of innovative activities at the low-capital cost stages, but not because of the higher labor productivity at the stages of high unemployment rate. Firm innovative activities are more productive when the cost of capital is high, but easier access to capital brings lower revenue created by the R&D inputs. The function of capital and innovation on a firm’s output is mutually substitutable to an extent, but the function of labor productivity cannot be replaced by engaging innovative activities.