Scandinavian Working Papers in Economics

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

No 11: Sources of Finance, R&D Investment and Productivity: Correlation or Causality?

Hans Lööf () and Almas Heshmati ()
Additional contact information
Hans Lööf: Centre of Excellence for Science and Innovation Studies, CESIS, Postal: Centre of Excellence for Science and Innovation Studies, CESIS,, Department of Infrastructure, Royal Institute of Technology, Stockholm, Sweden
Almas Heshmati: Techno-Economics Policy Program, College of Engineering, Postal: Seoul National University, Korea

Abstract: In general there is agreement about the positive impacts of R&D on performance of firms measured as productivity, profitability and growth. However, the opposite relationship is less obvious and very little attention has been paid on examining the feedback from performance on investment. This study is an attempt to contribute to the empirical analysis of the causal relationship between investment and performance. We examine the interaction between a number of financial indicators represented by investments in R&D and tangible capital and a number of performance variables including sales, value added, profit, cash flow, capital structure and employment on R&D and physical capital investments. Empirical results are based on a large panel data set of Swedish manufacturing firms over the period 1992-2000. The results show evidence of weak feedback effects from performance on investment.

Keywords: R&D Investsments; Productivity; Financial constraints; Panel Data

JEL-codes: C23; C33; G32; L19; O33

25 pages, September 24, 2004

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