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Financial Constraints and the Cyclicality of R&D Investment:Evidence from Slovenia

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  • Simona Bovha-Padilla
  • Joze P. Damijan
  • Jozef Konings

Abstract

This paper uses firm level data to show how R&D investment responds to shocks in sales growth in credit constrained firms. A credit constrained firm has to rely on its cash flow and borrowing capacity to survive its short-run liquidity shock when hit by a negative shock. This reduces the possibility for further borrowing in order to invest in non-tangible long term R&D, hence a negative shock should hit R&D investments more in firms that are more credit constrained. We find that in financially constrained firms sales growth is positively associated with R&D investment, suggesting procyclical behavior of R&D investment in credit constrained firms. In contrast, we find that in firms with no financial constraints R&D investment is negatively correlated with sales growth, suggesting countercyclical behavior of R&D, consistent with the Schumpeterian idea of restructuring. Furthermore, we find that the firm level response in R&D investment to sales growth is stronger in firms that are more financially dependent, such as firms that are no part of a multinational, firms not receiving subsidies or firms with less collateral.

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Bibliographic Info

Paper provided by LICOS - Centre for Institutions and Economic Performance, KU Leuven in its series LICOS Discussion Papers with number 23909.

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Date of creation: 2009
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Handle: RePEc:lic:licosd:23909

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Keywords: R&; D investment; financial constraints; cyclicality;

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References

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  1. Bean, Charles R., 1990. "Endogenous growth and the procyclical behaviour of productivity," European Economic Review, Elsevier, vol. 34(2-3), pages 355-363, May.
  2. Charles P. Himmelberg & Bruce C. Petersen, 1991. "R&D and internal finance: a panel study of small firms in high-tech industries," Working Paper Series, Macroeconomic Issues 91-25, Federal Reserve Bank of Chicago.
  3. Saint-Paul, G., 1992. "Productivity growth and the Structure of the Business Cycle," DELTA Working Papers 92-16, DELTA (Ecole normale supérieure).
  4. Degryse, Hans & de Jong, Abe, 2006. "Investment and internal finance: Asymmetric information or managerial discretion?," International Journal of Industrial Organization, Elsevier, vol. 24(1), pages 125-147, January.
  5. Joseph E. Stiglitz, 1993. "Endogenous Growth and Cycles," NBER Working Papers 4286, National Bureau of Economic Research, Inc.
  6. Philippe Aghion & Peter Howitt, 1997. "Endogenous Growth Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262011662, December.
  7. Jože P. Damijan & Mark Knell, 2005. "How Important Is Trade and Foreign Ownership in Closing the Technology Gap? Evidence from Estonia and Slovenia," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 141(2), pages 271-295, July.
  8. Zvi Griliches, 1990. "Patent Statistics as Economic Indicators: A Survey," NBER Working Papers 3301, National Bureau of Economic Research, Inc.
  9. Gadi Barlevy, 2004. "On the timing of innovation in stochastic Schumpeterian growth models," Working Paper Series WP-04-11, Federal Reserve Bank of Chicago.
  10. Gadi Barlevy, 2007. "On the Cyclicality of Research and Development," American Economic Review, American Economic Association, vol. 97(4), pages 1131-1164, September.
  11. Walde, Klaus & Woitek, Ulrich, 2004. "R&D expenditure in G7 countries and the implications for endogenous fluctuations and growth," Economics Letters, Elsevier, vol. 82(1), pages 91-97, January.
  12. Matthew Rafferty, 2003. "Do Business Cycles Influence Long-Run Growth? The Effect of Aggregate Demand on Firm-Financed R&D Expenditures," Eastern Economic Journal, Eastern Economic Association, vol. 29(4), pages 607-618, Fall.
  13. repec:fth:harver:1473 is not listed on IDEAS
  14. Patrick Francois & Huw Lloyd-Ellis, 2003. "Animal Spirits Through Creative Destruction," American Economic Review, American Economic Association, vol. 93(3), pages 530-550, June.
  15. Matthew Rafferty, 2003. "Do Business Cycles Alter the Composition of Research and Development Expenditures?," Contemporary Economic Policy, Western Economic Association International, vol. 21(3), pages 394-405, 07.
  16. Damijan, Joze P. & Knell, Mark & Majcen, Boris & Rojec, Matija, 2003. "The role of FDI, R&D accumulation and trade in transferring technology to transition countries: evidence from firm panel data for eight transition countries," Economic Systems, Elsevier, vol. 27(2), pages 189-204, June.
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Cited by:
  1. Masino, Serena, 2012. "Macroeconomic instability and the incentive to innovate," MPRA Paper 38766, University Library of Munich, Germany.
  2. Masino, Serena, 2012. "Macroeconomic instability and the incentive to innovate," MPRA Paper 38830, University Library of Munich, Germany.
  3. Paloma López-García & José Manuel Montero & Enrique Moral-Benito, 2012. "Business cycles and investment in intangibles: evidence from Spanish firms," Banco de Espa�a Working Papers 1219, Banco de Espa�a.

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