R&D Expenditures and Geographical Sales Diversification

This paper empirically examines the role of diversification in export markets on firm‐level R&D activities taking account of the potential endogeneity in this relationship. We show that geographical sales diversification across different regions of the world induces UK firms to increase their R&D expenditures, as firms must innovate and develop new products to maintain a competitive edge over their rivals. This finding is robust to a battery of sensitivity checks. Furthermore, we find that R&D expenditures cause higher export sales but do not cause export sales diversification. Hence, the result that diversification causes higher R&D activity is not driven by reverse causality.