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Asymmetric Effects Of The Business Cycle On Firm-Financed R&D

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  • Matthew Rafferty
  • Mark Funk

Abstract

Business cycles might affect the ability of firms to finance R&D, since firms rely on cash flow to finance most R&D activities. 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. The changes in the size and distribution of the pool may also be asymmetric across the business cycle. For example, cash-flow constraints are more likely to bind during recessions than expansions. This paper finds strong evidence for the cash-flow effect, but not the opportunity-cost effect. This means that R&D is pro-cyclical, but smoothing out the business cycle will actually lead to reduced R&D, since the duration of expansions exceeds the duration of recessions.

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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal Economics of Innovation and New Technology.

Volume (Year): 17 (2008)
Issue (Month): 5 ()
Pages: 497-510

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Handle: RePEc:taf:ecinnt:v:17:y:2008:i:5:p:497-510

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Related research

Keywords: Business cycle; R&D;

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Cited by:
  1. Masino, Serena, 2013. "Macro-Institutional Instability and the Incentive to Innovate," MPRA Paper 45938, University Library of Munich, Germany.
  2. William Griffiths & Elizabeth Webster, 2009. "What Governs Firm-Level R&D: Internal or External Factors?," Melbourne Institute Working Paper Series, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne wp2009n13, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne.
  3. Masino, Serena, 2012. "Macroeconomic instability and the incentive to innovate," MPRA Paper 38830, University Library of Munich, Germany.
  4. Hud, Martin & Hussinger, Katrin, 2014. "The impact of R&D subsidies during the crisis," ZEW Discussion Papers, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research 14-024, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  5. Masino, Serena, 2012. "Macroeconomic instability and the incentive to innovate," MPRA Paper 38766, University Library of Munich, Germany.

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