Many countries see increasing investment in education, research, development and innovation as a means of expanding production possibilities. Emphasis is placed on innovation policy because it plays a key role in creating room for growth. It has been shown that there is a positive relationship between investment in R&D and growth of productivity, value added or sales. However, one of the main characteristics of R&D activities is that firm that has borne the cost of R&D generally cannot fully appropriate the resulting benefits. The innovating firm is not the only one to profit from its innovative activities, since knowledge spills over to other firms. Seen from the point of view of the economy as a whole, the positive externality inherent in such knowledge spillovers means that firms invest “too little” in R&D. The existence of these spillovers is therefore a central argument in favour of government funding for R&D activities in firms.This project has encompassed both a comprehensive analysis of the literature published to date on the social benefits of R&D and the creation of a new database, which has been used to estimate the current private and social rates of return on R&D carried out in German firms.The R&D survey conducted by the Stifterverband provided a starting point for the empirical analysis. It was then complemented by selected data from the ZEW’s business databases (Amadeus, EPO) and from Germany’s Federal Statistics Office. The empirical results confirm the existence of high private (direct) and social (indirect) returns to R&D in Germany. The private output elasticity was found to be at about 0.08-0.09 in the period 1991-2005. That is an increase of the firm’s own R&D knowledge stock by 10% leads to an increase in labour productivity by 0.9% in two years. This implies an estimate of the private rate of return of about 0.41. Compared to results for other countries, the direct returns are above average. Furthermore, we observed a slight increase in the output elasticity compared to the period 1977-1989.R&D activities are furthermore associated with relatively high social returns. Based on productivity regressions, the output elasticity of external knowledge capital was found to vary between 0.017-0.029. At first glance this effect seems to be rather low. However, to get an estimate of the total social return at the aggregate level, the productivity effects of an increase in R&D by 1 Euro have to be summed up for all firms. This leads to an estimate of the social rate of return of about 0.52-0.65. That is, from an aggregate perspective indirect effects exceed directs effects of R&D by 1.3. The project additionally provides results for different subgroup of firms. They can be found in Studien zum deutschen Innovationssystem Nr. 15-2009 (in German only)