Abstract: This paper quantifies the effects of exogenous variations in the state of technology (technological opportunity) and of the R\&D of other firms (spillovers of R\&D) on the productivity of firms’ R\&D. The R\&D productivity is increased by the R\&D of \"technological neighbors,\" though neighbors’ R\&D lowers the profits and market value of low-R\&D-intensity firms. Firms are shown to adjust the technological composition of their R\&D in response to technological opportunity. Copyright 1986 by American Economic Association.