The Role of R&D Equiqment and Machinery for Firm Innovation and Collaboration

Physical capital is a major input to the innovation process alongside human capital. While the role of human capital for innovation has been documented in extant literature, less attention has been given to how investments in physical capital enable industrial innovation. We show that, while overinvestment in R&D equipment and machinery is associated with diminishing returns for innovation output in terms of patents and sales from new products, most firms invest below the infliction point. We show that physical capital is especially important for radical innovation and argue that this relationship is driven by an increased ability to attract external collaboration partners and increased productivity of internal R&D. Using Community Innovation Survey, patent, and register data from Denmark we find that, when it comes to innovation, firms benefit from increased investments in R&D equipment and machinery. Our study has important managerial implications as our results suggest that firms may not only benefit directly from strategic investments in physical capital for R&D but also indirectly through an improved ability to attract leading collaboration partners.