This chapter explores how purposive diversification of R&D affects R&D behavior and productivity in U.S. manufacturing. The findings support the predictions developed in Chapter 8.

Purposive diversification

The chapter shows that R&D diversification in large U.S. manufacturing firms is purposive, exploiting complementarities of various research activities and forming groups of related industry categories. The purposively diversified firms behave differently from randomly diversified or undiversified firms. One aspect of the behavioral differences between purposively diversified firms and others is that the former allocate relatively more R&D funds to industry categories where the appropriation of the returns from R&D is easier and relatively fewer funds to those categories where returns are more difficult to appropriate. Finally, R&D expenditure and productivity are more closely linked at the group level than at the industry-category level, suggesting that spillovers of knowledge across industry categories are important. The chapter's findings provide a key explanation for the firm effects found in Part II, because firms in the same industry category typically engage in very different forms of purposive R&D diversification and some do not diversify at all.

In Section 9.2, I use my methodology to distinguish nonpurposive or random diversification from any purposive diversification into a set of related, or close, R&D activities. “Nonpurposive” diversification here is discerned as diversification dissimilar to patterns found in significant clusters of firms.