The Market Value of Innovation: The Case of Indian Manufacturing

Authors: Sunil Kanwar (Delhi School of Economics) and Bronwyn Hall (University of California, Berkeley)

Abstract
We revisit the relationship between market value and innovation in the context of manufacturing firms in a developing country, using Indian data from 2001 through 2010. Surprisingly, we find that financial markets value the R&D investment of Indian firms the same or higher than such investment is valued in developed economies like the US. Using a proxy for the option value of R&D, we find that this accounts for a very small part of the R&D valuation (5% at most). We also find that the market value-R&D relationship does not vary significantly across industry groups, although these results are imprecise.

We find the R&D capital coefficient for Indian firms to be 1.75. This may be compared to the estimates of 1.92, 0.80, 0.41 and 0.36 for UK, US, France and Germany, reported in the literature. Our result carries the strong implication of underinvestment in R&D, because increasing R&D would more than pay for itself in market value increases. Further, a one standard deviation increase in market risk (proxied by industry sales variance) is associated with a 5% increase in the market value of firms, indicating that R&D-intensive firms are valued more highly due to the option value of R&D programmes.

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