Inverted-U relationship between R&D intensity and survival: Evidence on scale and complementarity effects in UK data

• Published in: Research policy Vol. 45; no. 7; pp. 1474 - 1492
• Main Authors: Ugur, Mehmet, Trushin, Eshref, Solomon, Edna
• Format: Journal Article
• Language: English
• Published: Amsterdam Elsevier B.V 01.09.2016; Elsevier Sequoia S.A
• Subjects: Firm dynamics; Innovation; Innovations; R&D; Research & development; Studies; Survival; Survival analysis; United Kingdom > UK; C41; R&D; Survival analysis; D21; Innovation; 03; D22; L1; Firm dynamics
• ISSN: 0048-7333; 1873-7625
• DOI: 10.1016/j.respol.2016.04.007

•We study the effect of R&D intensity on survival of 37,930 R&D-active UK firms from 1998 to 2012.•We develop and test a survival model that takes account of scale effects in R&D intensity, complementarity between R&D intensity and market concentration, creative destruction in the industry, and the premium on business loans.•Relationship between R&D intensity and survival is subject to diminishing scale effects: survival increases with R&D intensity at decreasing rates and eventually declines when R&D intensity is above an optimal level.•R&D-intensity and market concentration are complementary in that survival time at a given level of R&D intensity is longer when firms are located in concentrated industries.•Creative destruction in the industry and business lending premium have a negative effects on firm survival.•Firms that growth faster than the industry median for a sustained period before exit experience increased failure rates, perhaps due to absence of growth management strategies commensurate with high-growth ambitions.•Firm age, size, productivity and growth are correlated positively with survival; but there is an optimal level beyond which size reduces survival time.•Onset of a crisis and currency appreciation reduce survival time.•There is scope for active learning about the level of R&D intensity that maximizes survival time, which would depend on market concentration and R&D intensity in the industry. Existing evidence on the relationship between R&D intensity and firm survival is varied and often conflicting. We argue that this may be due to overlooking R&D scale effects and complementarity between R&D intensity and market concentration. Drawing on Schumpeterian models of competition and innovation, we address these issues by developing a formal model of firm survival and using a panel dataset of 37,930 of R&D-active UK firms over 1998–2012. We report the following findings: (i) the relationship between R&D intensity and firm survival follows an inverted-U pattern that reflects diminishing scale effects; (ii) R&D intensity and market concentration are complements in that R&D-active firms have longer survival time if they are in more concentrated industries; and (iii) creative destruction as proxied by median R&D intensity in the industry and the premium on business lending have negative effects on firm survival. Other findings concerning age, size, productivity, relative growth, Pavitt technology classes and the macroeconomic environment are in line with the existing literature. The results are strongly or moderately robust to different samples, stepwise estimations, and controls for frailty and left truncation.