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Research and development (R&D) has a large effect on both state output and total factor productivity in the long run. Our estimates for the private sector of the U.S. states from 1963 to 2007 show that the R&D elasticity averages 0.056-0.143. The implied returns to state Gross Domestic Product (GDP) from R&D spending are 82-211%. There are also positive R&D spillovers, with 70-80% of the total returns accruing to other states. We also find that states with more human capital have higher own- and other-R&D elasticities, and those in lowest tier of economic development have the least own-state R&D elasticity but the highest other-R&D elasticity. In addition, we find that the positive effect of R&D spillovers across states is larger when we consider R&D spillovers across states based on economic similarity of R&D across sectors. [ABSTRACT FROM AUTHOR]