The path of R&D efficiency over time

•We estimate the pattern of R&D efficiency in terms of firms' product innovations•We distinguish between physical R&D capital and human R&D capital•The length of R&D histories and R&D interruptions are drivers of innovation outcomes•R&D efficiency grows over R&D years at a positive but decreasing rate•Interruptions in R&D reduce R&D efficiency but there are spillovers between spells

In this paper we investigate the pattern of R&D efficiency in terms of the number of product innovations achieved by firms over time. Using a panel dataset of Spanish manufacturing firms for the period 1990-2006, we follow the innovative performance of R&D active firms and observe that innovation rates change over firms' R&D histories. To explain these facts we propose a model that explicitly acknowledges the twofold composition of firms' R&D expenditures, comprising spending on both physical capital for R&D projects and payments to researchers. We regard this latter component of R&D as a source for dynamic returns to firms' R&D investments. Consequently firms' innovation outcomes clearly depend on how long they have been investing in R&D and also on whether there have been any interruptions in the temporal sequence of R&D activities. Our results suggest that R&D activities exhibit dynamic returns that are positive but at a decreasing rate, and that interruptions in R&D engagement reduce R&D efficiency.