Abstract
Company cross-section data are used to investigate 2 interrelated issues regarding the determinants of industrial research and development (R&D) activity. The issues address: 1. the relative importance of market conditions and exogenous technological conditions in determining the allocation of resources to research and in explaining the growth of productivity, and 2. whether there are observable spillover effects among firms' research programs. It is found that, when allowing for all 3 effects, both technological position and industry are significant in explaining R&D intensity, but it is not possible to distinguish between these 2 in explaining total factor productivity growth. There is also evidence of the effects of spillovers in the innovation process, with positive externalities apparently outweighing any negative competitive effects on average. The evidence is ambiguous on how far the spillovers tend to travel in technology space.