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Sources of Finance, R&D Investment and Productivity: Correlation or Causality?

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Author Info
Lööf, Hans () (Centre of Excellence for Science and Innovation Studies, CESIS)
Heshmati, Almas () (Techno-Economics Policy Program, College of Engineering)

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Abstract

In general there is agreement about the positive impacts of R&D on performance of firms measured as productivity, profitability and growth. However, the opposite relationship is less obvious and very little attention has been paid on examining the feedback from performance on investment. This study is an attempt to contribute to the empirical analysis of the causal relationship between investment and performance. We examine the interaction between a number of financial indicators represented by investments in R&D and tangible capital and a number of performance variables including sales, value added, profit, cash flow, capital structure and employment on R&D and physical capital investments. Empirical results are based on a large panel data set of Swedish manufacturing firms over the period 1992-2000. The results show evidence of weak feedback effects from performance on investment.

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Publisher Info
Paper provided by Royal Institute of Technology, CESIS - Centre of Excellence for Science and Innovation Studies in its series Working Paper Series in Economics and Institutions of Innovation with number 11.

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Length: 25 pages
Date of creation: 24 Sep 2004
Date of revision:
Publication status: Forthcoming in ICFAI Journal of Industrial Economics, 2006.
Handle: RePEc:hhs:cesisp:0011

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Postal: CESIS - Centre of Excellence for Science and Innovation Studies, Royal Institute of Technology, SE-100 44 Stockholm, Sweden
Phone: +46 8 790 95 63
Web page: http://www.infra.kth.se/cesis/
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Related research
Keywords: R&D Investsments; Productivity; Financial constraints; Panel Data;

Find related papers by JEL classification:
C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data
C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data
G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Capital and Ownership Structure
L19 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Other
O33 - Economic Development, Technological Change, and Growth - - Technological Change - - - Technological Change: Choices and Consequences; Diffusion Processes

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References listed on IDEAS
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  1. Arellano, Manuel & Bond, Stephen, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Blackwell Publishing, vol. 58(2), pages 277-97, April. [Downloadable!] (restricted)
  2. Granger, C W J, 1969. "Investigating Causal Relations by Econometric Models and Cross-Spectral Methods," Econometrica, Econometric Society, vol. 37(3), pages 424-38, July. [Downloadable!] (restricted)
  3. Ward Brown, 1997. "R&D Intensity and Finance: Are Innovative Firms Financially Constrained?," FMG Discussion Papers dp271, Financial Markets Group. [Downloadable!] (restricted)
  4. Cohen, Wesley M & Klepper, Steven, 1996. "A Reprise of Size and R&D," Economic Journal, Royal Economic Society, vol. 106(437), pages 925-51, July. [Downloadable!] (restricted)
  5. Baumol, William J & Wolff, Edward N, 1983. " Feedback from Productivity Growth to R & D," Scandinavian Journal of Economics, Blackwell Publishing, vol. 85(2), pages 147-57.
  6. Blundell, Richard & Bond, Stephen, 1998. "Initial conditions and moment restrictions in dynamic panel data models," Journal of Econometrics, Elsevier, vol. 87(1), pages 115-143, August. [Downloadable!] (restricted)
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  7. Kenneth Arrow, 1962. "Economic Welfare and the Allocation of Resources for Invention," NBER Chapters, in: The Rate and Direction of Inventive Activity: Economic and Social Factors, pages 609-626 National Bureau of Economic Research, Inc. [Downloadable!]
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