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CESIS - Centre of Excellence for Science and Innovation Studies, Royal Institute of Technology KTH/CESIS Working Paper Series in Economics and Institutions of Innovation

No 440:
Dynamic R&D Choice and the Impact of the Firm's Financial Strength

Bettina Peters (), Mark J. Roberts () and Van Anh Vuong ()

Abstract: 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.

Keywords: R&D choice; financial strength; innovation; productivity; dynamic structural model; (follow links to similar papers)

JEL-Codes: G30; O31; O32; (follow links to similar papers)

27 pages, June 2, 2016

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