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Quantifying sunk costs and learning effects in R&D persistence

J.A. Mañez and J.H. Love

Research Policy, 2020, vol. 49, issue 7

Abstract: This paper analyzes and quantifies the fundamental factors that are likely to cause persistence in performing R&D activities: the existence of sunk costs associated with R&D activities and the process of learning that characterizes this type of activity. We estimate our model with Spanish manufacturing firms for the period 1991-2014. By decomposing the effects of sunk costs and learning effects, we find that both are important determinants of R&D persistence, and that failing to allow for learning systematically overestimates sunk cost effects. Both large firms and SMEs benefit from direct and indirect (via productivity) effects of R&D experience, but in large firms this is more likely to be manifest through productivity improvements while in smaller firms the effect is more skewed towards a direct effect on R&D likelihood. Further, our results suggest that whereas the impact of sunk costs in R&D persistence is greater for large firms than for SMEs, the scope for direct learning from continuous R&D engagement is greater for SMEs than for larger firms.

Keywords: R&D persistence; Sunk costs; Learning effects, JEL: O32, L60 (search for similar items in EconPapers)
Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:eee:respol:v:49:y:2020:i:7:s0048733320300846

DOI: 10.1016/j.respol.2020.104004

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Research Policy is currently edited by M. Bell, B. Martin, W.E. Steinmueller, A. Arora, M. Callon, M. Kenney, S. Kuhlmann, Keun Lee and F. Murray

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