This paper studies the effect of R&D spillovers on R&D spending and productivity in a sample of German manufacturing firms. Using panel estimation techniques, the results suggest that spillovers affect industries in a heterogeneous manner. In terms of R&D investment, firms in high-technology sectors appear to react positively and more strongly to spillovers than firms in other industries. Experiments with alternative spillover definitions suggest that the effect is not due to racing phenomena. Moreover, in high-technology industries spillovers have a productivity-enhancing effect in addition to encouraging R&D investment. The effect is conditioned by the firm’s own R&D activity. Consistent with the hypothesis of absorptive capacity, high R&D capital stocks appear to enable firms to profit from external R&D.
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