The Market Valuation of Innovation in Weak Innovation Regimes

In India, a country where most firms do not obtain product patents, few firms obtain process patents, petty patents are not an option, and R&D activity is generally modest, the concern is whether R&D-related innovation is visible to agents and potential investors in the stock market. Research presented by Professor Sunil Kanwar and Professor Bronwyn Hall at the European Policy for Intellectual Property (EPIP 2015) conference in Glasgow, organized by CREATe (Research Councils UK Copyright Centre), found evidence that this is indeed so.

Employing a large dataset of manufacturing firms from the emerging Indian economy spanning 2001-2010, they find that the knowledge capital of firms (or the stock of know-how embodied in the ideas, innovations, and inventions over which a firm has ownership) has a strong association with the capitalized market value of firms. A doubling of the knowledge capital stock (relative to that of physical capital) would lead to an increase in market value (relative to physical capital) of approximately 14%, which translates to a higher than normal rate of return on R&D investment. A comparison of this effect with those for developed countries is, however, clouded by the different levels of R&D capital (relative to physical capital) across countries.

To circumvent this problem, the authors consider instead the marginal effect of a unit change in knowledge capital on the percentage change in the capitalized market value of a firm, and find this estimate to be around 1.75 per cent. Barring the UK (1.92%), this magnitude appears to exceed those reported by studies for several developed countries such as France (0.41%), Germany (0.36%) and the US (0.80%), and strongly implies that one unit of investment in R&D would much more than pay for itself by raising the capitalized market value of the firm.

While this result could be amenable to alternative interpretations, the more probable explanation seems to be that Indian firms underinvest in R&D, possibly due to ex ante risk perceptions. Further investigation by the authors reveals, that another reason why R&D-intensive firms are valued more highly is because R&D programmes allow firms the flexibility of switching out to mitigate downside risk, while also preserving the upside potential.


Notes for editors: ‘The market value of innovation’ by Sunil Kanwar and Bronwyn H. Hall is a paper presented at the European Policy for Intellectual Property (EPIP) Conference, University of Glasgow, 2-3 September 2015.  For more information visit:

Sunil Kanwar is Professor, Delhi School of Economics, University of Delhi

Bronwyn H. Hall is Professor, University of California Berkeley; NBER, IFS, NIESR

For further information contact the lead author Sunil Kanwar (email: or the CREATe PR team (email:

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