Abstract: Many writers have claimed that research and development (R\&D) has two faces. In addition to the conventional role of stimulating innovation, R\&D enhances technology transfer (absorptive capacity). We explore this idea empirically using a panel of industries across twelve OECD countries. We find R\&D to be statistically and economically important in both technological catch-up and innovation. Human capital also plays an major role in productivity growth, but we only find a small effect of trade. In failing to take account of R\&D-based absorptive capacity, existing U.S.-based studies may underestimate the return to R\&D.