Investment, R&D and Financial Constraints in Britain and Germany

Stephen Bond, Dietmar Harhoff and John van Reenen

Annals of Economics and Statistics, 2005, issue 79-80, 433-460

Abstract: This paper tests for the importance of cash flow on investment in fixed capital and R&D using firm-level panel data in two countries between 1985 and 1994. For German firms, cash flow is not informative in simple econometric models of fixed investment or R&D. In identical specifications for British firms, cash flow is informative about investment, although not about the level of R&D spending conditional on the R&D participation decision. In the UK, we also find that investment is less sensitive to cash flow for R&D-performing firms, and that cash flow predicts whether firms perform R&D or not. We confirm that these differences do not simply reflect a greater role for current cash flow in forecasting future sales. These results suggest that financial constraints are more significant in Britain, that they affect the decision to engage in R&D rather than the level of R&D spending by participants, and that consequently the British firms that do engage in R&D are a self-selected group where financing constraints tend to be less binding.

Date: 2005
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Citations: View citations in EconPapers (66)

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Related works:
Chapter: Investment, R&D and Financial Constraints in Britain and Germany (2010)
Working Paper: Investment, R&D and Financial Constraints in Britain and Germany (2003)
Working Paper: Investment, R&D and financial constraints in Britain and Germany (2003)
Working Paper: Investment, R&D and financial constraints in Britain and Germany (1999)
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Persistent link: https://EconPapers.repec.org/RePEc:adr:anecst:y:2005:i:79-80:p:433-460

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