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 440: Dynamic R&D Choice and the Impact of the Firm's Financial Strength

Bettina Peters (), Mark J. Roberts () and Van Anh Vuong ()
Additional contact information
Bettina Peters: Centre for European Economic Research (ZEW)
Mark J. Roberts: Pennsylvania State University and NBER
Van Anh Vuong: University of Cologne and Institute of Energy Economics

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

JEL-codes: G30; O31; O32

27 pages, June 2, 2016

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