R&D And Catch-Up Effect Among Software-As-A-Service Firms: A Stochastic Frontier Approach

Since its inception, SaaS market has been one of the fastest growing segments in the software industry. This paper is the first attempt to measure the productivity of pure-SaaS firms by adopting a stochastic frontier approach. Using an annual dataset from 2002 to 2009, we conduct a two-stage analysis. In the first stage, we derive the efficiency scores of each SaaS firm. We found average technical efficiency has been increasing due to catch-up effect in recent years. In the second stage’s analysis, R&D investments are found to be negatively associated with SaaS firm’s technical efficiency. Our results also show that R&D investments significantly contribute to the 1-year growth of technical efficiency of SaaS firms.

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