Dynamic R&D choice and the impact of the firm's financial strength

Bettina Peters (), Mark Roberts and Van Anh Vuong

Economics of Innovation and New Technology, 2017, vol. 26, issue 1-2, 134-149

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% of firm value. It ranges from 11.6% for firms in a strong financial position to 2.3% for firms in a weaker financial position.

Date: 2017
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Working Paper: Dynamic R&D Choice and the Impact of the Firm's Financial Strength (2016)
Working Paper: Dynamic R&D Choice and the Impact of the Firm's Financial Strength (2016)
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DOI: 10.1080/10438599.2016.1202516

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