Firms invest in research and development both to improve the products they sell and to improve the methods used to produce them. We study these two channels using detailed Danish data that link firm-product revenues and physical quantities to firm-level inputs and to firms’ allocation of R&D spending across product and process innovation. We estimate product-level demand to recover a time-varying measure of product appeal conditional on price. We separately estimate a multiproduct production function and a variable cost function to recover physical production efficiency, marginal costs, and markups. Product R&D is associated with higher product appeal and higher prices, while process R&D is associated with lower marginal costs, higher physical efficiency, lower prices, and higher quantities. The decomposition is similar when marginal costs and markups are recovered from demand and when they are recovered from the cost function. The results show that treating R&D as a single investment margin masks important differences between innovation directed toward products and innovation directed toward production processes.