Measuring technological capability and performance

ABSTRACT

The relation between technological capability and firm performance is more complex than what is generally assumed. Researchers have not been able to consistently find empirical support for this apparently 'simple' relation. The objective of this study is to illustrate the theoretical and empirical complexity of this relation and explain why the use of different measures can lead to dramatically different results. In this study, we analyse the technological capability–performance relation in 201 large US public manufacturing companies. A variety of patent statistics and a measure of research & development (R&D) intensity are used as indicators for technological capability. The following six measures of performance are used as dependent variables: return on assets, return on equity, return on sales, market value, market value added, and economic value added. The results vary substantially, depending on which measures are used for the independent and dependent variables. A detailed understanding of precisely what each measure represents and the shortcomings of each measure is needed to explain why these differences exist. We conclude by discussing the effectiveness of a variety of technological capability measures using patent citations, and illustrate why a measure of R&D spending and the total number of patents are usually not valid measures of a firm's technological capability.