Gaining comparative advantage through discretionary expenditures: The returns to R&D and advertising

The authors explore the extent to which R&D and advertising expenditures generate a comparative advantage that allows firms to earn supranormal profits. After controlling for unobserved firm-specific factors and the feedback between discretionary expenditures and profitability, the present results suggest substantially lower accounting and stock market returns to R&D and advertising than indicated in previous research. Isolating mechanisms, which prevent imitation, do not appear sufficient for either R&D or advertising expenditures to generate, on the average, a long-run comparative advantage.