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Demand shocks and firm-financed R&D expenditures

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  • Matthew Rafferty
  • Mark Funk

Abstract

Business cycles might affect firms' ability and incentive to perform R&D. Firms finance most R&D activities out of cash flow so when cash flow decreases the funds available for R&D also decreases. This limits the ability of firms to perform R&D, potentially leading to reduced R&D expenditures during recessions. However, business cycles also influence the incentive to perform R&D. The opportunity cost of funds devoted to R&D falls during recessions since the return on production will likely be lower than during an expansion. During recessions, this provides firms with an incentive to redistribute an existing pool of funds away from production and towards R&D projects. This paper tests whether the business cycle influences the incentive and ability of firms to engage in R&D activities, in particular examining whether the response is symmetric across the business cycle.

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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal Applied Economics.

Volume (Year): 36 (2004)
Issue (Month): 14 ()
Pages: 1529-1536

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Handle: RePEc:taf:applec:v:36:y:2004:i:14:p:1529-1536

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References

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  1. M Pesaran & Yongcheol Shin & Ron P Smith, 2004. "Pooled mean group estimation of dynamic heterogeneous panels," ESE Discussion Papers 16, Edinburgh School of Economics, University of Edinburgh.
  2. Im, Kyung So & Pesaran, M. Hashem & Shin, Yongcheol, 2003. "Testing for unit roots in heterogeneous panels," Journal of Econometrics, Elsevier, vol. 115(1), pages 53-74, July.
  3. Benoit Mulkay & Bronwyn H. Hall & Jacques Mairesse, 2000. "Firm Level Investment and R&D in France and the United States: A Comparison," NBER Working Papers 8038, National Bureau of Economic Research, Inc.
  4. repec:fth:coluec:540 is not listed on IDEAS
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Cited by:
  1. Rammer, Christian, 2012. "Schwerpunktbericht zur Innovationserhebung 2010: Management von Innovationsprojekten - Auswirkungen der Wirtschaftskrise," ZEW Dokumentationen 12-03, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  2. Taiji Harashima, 2005. "The Pro-cyclical R&D Puzzle: Technology Shocks and Pro-cyclical R&D Expenditure," Macroeconomics 0507012, EconWPA, revised 12 Jul 2005.
  3. Rammer, Christian, 2011. "Auswirkungen der Wirtschaftskrise auf die Innovationstätigkeit der Unternehmen in Deutschland," ZEW Discussion Papers 11-070, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.

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