DIMINISHING RETURNS TO R&D INVESTMENT ON INNOVATION IN MANUFACTURING SMEs: DO THE TECHNOLOGICAL INTENSITY OF INDUSTRY MATTER?

Abstract

This paper examined the nonlinear R&D-innovation relationships of SMEs (small and medium-sized enterprises) and the differences in the strength and productivity of R&D investment between low-, medium-, and high-tech industry sectors. Using 2740 firm data in South Korea, this study found that R&D investment has an inverted U-shaped relationship with registered patents such that patents increase at a decreasing rate as R&D investment increases. The relationship between R&D investment and innovative sales resulting from R&D investment in manufacturing SMEs also exhibits an inverted U-shaped form. The R&D-innovation relationship of SMEs in high-tech sectors is more strengthened such that the optimal level of R&D investment in high-tech sectors is higher than those for SMEs in low-tech sectors. This study also demonstrated that the R&D-innovation relationship for high-tech sectors is more flattened so that the diminishing returns to R&D investment is weakened with the increase of technological intensity of industry sectors.