DP1432 | Innovations, Patents and Cash Flow

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In this paper we estimate a dynamically recursive model of the relationship between innovations, patents and cash flow. Our results suggest that: (i) lagged patents are significant predictors of current innovation, but lagged innovations do not affect the conditional expectation of current patents; (ii) patents are influenced primarily by advances in the science base as measured by R&D intensity and spillovers, while innovations are more sensitive to cash flow and demand shocks; (iii) innovations have a greater impact on cash flow than patents; and (iv) both patents and innovations show strong history dependence. We use our model to simulate the effects of spending £500m on any one of three different types of traditional government policies designed to support innovative activities of firms (non-discretionary R&D subsidies, cuts in corporate tax and stimulation of macroeconomic demand growth). These simulations suggest that the role for state intervention in promoting technological advance is decidedly limited.