FIRMS’ R&D DILEMMA: TO UNDERTAKE OR NOT TO UNDERTAKE R&D

Xulia González () and Consuelo Pazó ()

No 208, Working Papers from Universidade de Vigo, Departamento de Economía Aplicada

Abstract: It is well known that in most industries a significant proportion of firms do not perform innovative activities. Although empirical studies on the determinants of R&D often have taken this fact into account by considering the dependent variable as a censured one, there is not an explicit theoretical model to explain the zeros. The concern of this letter is to discuss a simple theoretical model where firms simultaneously decide whether to undertake or not R&D activities jointly with the l evel of the R&D investment. We show that a firm performs R&D activities only when its optimal level of R&D expenditure is higher than a threshold. Additionally, we show that both the probability of undertaking R&D activities and the R&D expenditure increase with market power, with the elasticity of demand with respect to quality and with the elasticity of quality with respect to R&D. Finally, from this simple theoretical framework we discuss a suitable econometric model that threats these decisions simultaneously.

Keywords: R&D; thresholds; Tobit model. (search for similar items in EconPapers)
JEL-codes: C24 L1 O32 (search for similar items in EconPapers)
Pages: 11 pages
Date: 2002-10
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Journal Article: Firms' R&D dilemma: to undertake or not to undertake R&D (2004)
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Persistent link: https://EconPapers.repec.org/RePEc:vig:wpaper:0208

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