There is a large and wide-ranging literature that examines various aspects of the impact of innovation upon economic performance. The main driving forces of this literature are a desire to understand the determinants of output and productivity growth and the potential role for, and impact of, policy intervention. Within this general literature a growing body relates to the impact of research and development (R&D) in particular. This literature in turn includes two main strands: one focusing upon the impact of R&D on productivity (for reviews see Griliches, 1995, and Mairesse and Mohen, 1996) and the other on market valuation (for a review see Hall, 2000). The present paper concentrates upon the market valuation approach, the rationale for which, as discussed by Hall (2000) is that, if capital markets operate efficiently, then the market valuation of a company should be a forward looking indicator of firm performance reflecting the discounted sum of future dividends, which, in turn, should be closely related to the discounted sum of future profits. In particular, market values should reflect the future expected

* The research reported upon in this paper has been financed by the Economic and Social Research Council as part of a larger project on Intellectual Property Rights (Company Performance and the Value of Intellectual Property, ESRC grant number L325253005). The first author’s research was also funded by the Academy of Finland and the Yrjo Jahnsson foundation, which he would like to thank for support. Parts of this work were carried out while the first author was visiting MIT and NBER, whose hospitality is gratefully acknowledged. Particular thanks are due to the UK Patent Office, which provided UK patent information on CD, and to Mark Longland for compiling the data set used in the present study. Thanks also to Christine Greenhalgh for comments on various drafts of the paper and to an anonymous referee. Any remaining errors are the responsibility of the authors.