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

Stephen Bond (), Dietmar Harhoff () and John van Reenen ()
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Stephen Bond: Institute for Fiscal Studies and Nuffield College, Oxford

No W99/05, IFS Working Papers from Institute for Fiscal Studies

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 pecifications 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&D-performing 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.

JEL-codes: O31 C25 L13 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dev and nep-tid
Date: 1999-03-30
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http://www.ifs.org.uk/wps/wp9905.pdf (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) Downloads
Working Paper: Investment, R&D and Financial Constraints in Britain and Germany (2003) Downloads
Working Paper: Investment, R&D and financial constraints in Britain and Germany (2003) Downloads
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