Investment, R&D and financial constraints in Britain and Germany

Stephen Bond, Dietmar Harhoff and John van Reenen

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

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&Dperforming 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.

Keywords: Investment; R&D; cash flow; financial constraints; panel data. (search for similar items in EconPapers)
JEL-codes: C25 L13 O31 (search for similar items in EconPapers)
Pages: 57 pages
Date: 2003-12
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (38)

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http://eprints.lse.ac.uk/771/ Open access version. (application/pdf)

Related works:
Chapter: Investment, R&D and Financial Constraints in Britain and Germany (2010)
Journal Article: Investment, R&D and Financial Constraints in Britain and Germany (2005)
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:ehl:lserod:771

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