Heterogeneity in the returns to R&D activities is of paramount importance for policy. Firms are expected to invest more in those innovation activities that yield positive returns; in other words, if the returns are low, as in the case of many developing and middle-income countries (Goñi and Maloney 2017), it is unlikely that firms will invest in innovation activities. Policies that aim to encourage investments in R&D but cannot affect these returns will fail, especially in sectors and regions with low returns. Therefore, understanding what factors explain these low returns and the heterogeneity in attaining them is critical for policy design and effectiveness.

In this paper, we examine the hypothesis that several contextual factors determine both the set of technological possibilities and the probabilities the innovation will succeed (in terms of higher productivity), as well as firms’ capacity to appropriate the rewards of innovative investments in their production process. We call these factors, respectively, _knowledge complementary factors_ and _market complementary factors._ We also hypothesize that the impact of these complementary factors is mediated by the firm’s innovative capacity, which is manifested in specific management strategies that can maximize the returns when these complementary factors are available.

This study contributes to previous literature because it is the first to empirically analyze the relationship between contextual factors and R&D returns in Argentina with micro-level data in a comprehensive set-up.<sup>4</sup> In Argentina, firms’ context is frequently mentioned as an important factor incentivizing firms’ defensive or short-term low-risk strategies, instead of pursuing longer-term innovative strategies that could boost productivity levels (Katz 2000, Katz and Bernat 2011, Arza 2013, Kosacoff 2000, Chudnovsky 2001, Fanelli 2002). The novelty of our approach lies in the comprehensive evaluation of this hypothesis in an econometric framework. This allows us to estimate the relationship between innovation returns and the context dimensions (which we group into “knowledge” and “market” factors), while also considering firm-specific innovative capacity. In addition, this is one of the first papers that uses data from the second wave of the Employment and Innovation Dynamics National Survey (known as ENDEI, for its Spanish acronym) (ENDEI 2014–2016). By merging ENDEI data with contextual characteristics defined at the sectoral and/or regional level,<sup>5</sup> this paper also improves data availability by creating a novel and original database that could be useful for future studies.

The remaining of this paper is organized as follows. Section 2 describes the Argentinean context and its R&D and productivity performance to motivate the discussion. Section 3 describes the conceptual framework used. Section 4 describes the methodology and data. Section 5 presents results of the estimation of the production function. Section 6 concludes by offering policy recommendations, suggesting lines for future research, and discussing implications for data collection. The appendixes provide supplemental data and analysis.

# **2. The Argentinean Context**

Although Argentina’s expenditure on R&D relative to GDP or in US dollars per capita is much lower than that in developed countries, it is higher than that in regional peers, with the exception

> 4 At the macro level, the potential impact of these complementarities has been explored in, for example, Klenow ‐ and Rodriguez-Clare (2005), Maloney and Rodríguez Clare (2007), and Goñi and Maloney (2017)—but not specifically for Argentina. These studies stress the importance (or the lack) of these complementary factors in explaining differences in the returns of R&D across countries and in the distance to the technological frontier. 5 This database was built using a variety of different data sources, each originally with different levels of disaggregation. Details are presented in appendix A, table A.1.

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