EconPapers    
Economics at your fingertips  
 

ASYMMETRIC EFFECTS OF THE BUSINESS CYCLE ON FIRM-FINANCED R&D

Matthew Rafferty and Mark Funk

Economics of Innovation and New Technology, 2008, vol. 17, issue 5, 497-510

Abstract: Business cycles might affect the ability of firms to finance R&D, since firms rely on cash flow to finance most R&D activities. However, business cycles also influence the incentive to perform R&D. The opportunity cost of funds devoted to R&D falls during recessions, since the return on production will likely be lower than during an expansion. During recessions, this provides firms with an incentive to redistribute an existing pool of funds away from production and towards R&D projects. The changes in the size and distribution of the pool may also be asymmetric across the business cycle. For example, cash-flow constraints are more likely to bind during recessions than expansions. This paper finds strong evidence for the cash-flow effect, but not the opportunity-cost effect. This means that R&D is pro-cyclical, but smoothing out the business cycle will actually lead to reduced R&D, since the duration of expansions exceeds the duration of recessions.

Keywords: Business cycle; R&D (search for similar items in EconPapers)
Date: 2008
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (23) Track citations by RSS feed

Downloads: (external link)
http://www.tandfonline.com/doi/abs/10.1080/10438590701407232 (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:taf:ecinnt:v:17:y:2008:i:5:p:497-510

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/GEIN20

DOI: 10.1080/10438590701407232

Access Statistics for this article

Economics of Innovation and New Technology is currently edited by Professor Cristiano Antonelli

More articles in Economics of Innovation and New Technology from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().

 
Page updated 2022-08-15
Handle: RePEc:taf:ecinnt:v:17:y:2008:i:5:p:497-510