An Empirical Examination of the Procyclicality of R&D Investment and Innovation

Kira R. Fabrizio and Ulya Tsolmon
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Kira R. Fabrizio: Boston University School of Management
Ulya Tsolmon: Duke University

The Review of Economics and Statistics, 2014, vol. 96, issue 4, 662-675

Abstract: The Schumpeterian opportunity cost hypothesis predicts that firms concentrate innovative activities in recessions. However, empirical evidence suggests that innovative activities are procyclical. Theory proposes that firms shift R&D investments and innovation from recessions to booms to maximize returns by capturing high-demand periods before imitators compete away rents. This paper provides the first empirical test of these predictions. Results indicate that R&D spending is more procyclical in industries with faster obsolescence, where matching invention to demand is more valuable, and innovation is more procyclical in industries with weaker IP protection, where imitation poses a greater threat. © 2014 The President and Fellows of Harvard College and the Massachusetts Institute of Technology

Keywords: cost hypothesis; recession; investments; innovation; procyclical; imitations (search for similar items in EconPapers)
JEL-codes: O23 O31 (search for similar items in EconPapers)
Date: 2014
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