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Businesses invest in R&D to develop new products and more efficient processes. Both types of innovation increase productivity: New product releases create greater value from the same level of inputs, and more efficient processes allow firms to produce the same products with fewer inputs.
A recent study quantifies the impact of R&D investments on productivity in Ireland. The authors analyzed data on more than 10,000 Irish firms from 2006 to 2012 and found that for the average firm, a 10 percent increase in R&D investment per employee raised productivity by 12 percent. In fact, they found that R&D investments have a much larger impact on productivity than investments in “traditional” physical capital, such as new machines or factories.