Dynamic R&D Choice and the Impact of the Firm's Financial Strength
This article investigates how a firm's financial strength affects its dynamic decision to invest in R&D. We estimate a dynamic model of R&D choice using data for German firms in high-tech manufacturing industries. The model incorporates a measure of the firm's financial strength, derived from its credit rating, which is shown to lead to substantial differences in estimates of the costs and expected long- run benefits from R&D investment. Financially strong firms have a higher probability of generating innovations from their R&D investment, and the innovations have a larger impact on productivity and profits. Averaging across all firms, the long run benefit of investing in R&D equals 6.6 percent of firm value. It ranges from 11.6 percent for firms in a strong financial position to 2.3 percent for firms in a weaker financial position.
We are grateful to Eric Bartelsman, Bronwyn Hall, Jordi Jaumandreu, Hans Lööf, Florin Maican, Jacques Mairesse, Pierre Mohnen, Matilda Orth, and Hongsong Zhang for helpful comments and discussions. We thank the Center for European Economic Research (ZEW) for providing data access and research support. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Bettina Peters & Mark J. Roberts & Van Anh Vuong, 2017. "Dynamic R&D choice and the impact of the firm's financial strength," Economics of Innovation and New Technology, vol 26(1-2), pages 134-149. citation courtesy of