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The Interaction Between Capital Investment and R&D in Science-Based Firms

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  • Saul Lach
  • Mark Schankerman

Abstract

This paper analyzes the interaction among R&D, capital investment , and the stock market rate of return for 191 firms in science-based industries for the period 1973-1981. Using a framework based on dynamic factor analysis, we show how several prominent hypotheses about the determination of R&D and investment generate testable parameter restrictions. The data indicate that R&D Granger-causes investment, but that investment does not Granger-cause R&D. We use this finding to examine the validity of those hypotheses, to characterize the movements over time of R&D and investment, and to measure the stock market valuation of these movements.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2377.

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Date of creation: Aug 1987
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Publication status: published as "Dynamics of R & D and Investment in the Scientific Sector," Journal of Political Economy, Vol. 97, No. 4, pp. 880-904, August 1989.
Handle: RePEc:nbr:nberwo:2377

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  1. M. Ishaq Nadiri & Sherwin Rosen, 1973. "A Disequilibrium Model of Demand for Factors of Production," NBER Books, National Bureau of Economic Research, Inc, number nadi73-1.
  2. Lucas, Robert E, Jr & Prescott, Edward C, 1971. "Investment Under Uncertainty," Econometrica, Econometric Society, Econometric Society, vol. 39(5), pages 659-81, September.
  3. Zvi Griliches, 1998. "Issues in Assessing the Contribution of Research and Development to Productivity Growth," NBER Chapters, in: R&D and Productivity: The Econometric Evidence, pages 17-45 National Bureau of Economic Research, Inc.
  4. Thomas J. Sargent & Christopher A. Sims, 1977. "Business cycle modeling without pretending to have too much a priori economic theory," Working Papers, Federal Reserve Bank of Minneapolis 55, Federal Reserve Bank of Minneapolis.
  5. Jacques Mairesse & Alan K. Siu, 1982. "An Extended Accelerator Model of R&D and Physical Investment," NBER Working Papers 0968, National Bureau of Economic Research, Inc.
  6. Pakes, Ariel, 1985. "On Patents, R&D, and the Stock Market Rate of Return," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 93(2), pages 390-409, April.
  7. Douglas Holtz-Eakin & Whitney K. Newey & Harvey S. Rosen, 1989. "Implementing Causality Tests with Panel Data, with an Example from LocalPublic Finance," NBER Technical Working Papers 0048, National Bureau of Economic Research, Inc.
  8. LeRoy, Stephen F & Porter, Richard D, 1981. "The Present-Value Relation: Tests Based on Implied Variance Bounds," Econometrica, Econometric Society, Econometric Society, vol. 49(3), pages 555-74, May.
  9. Rosenberg, Nathan, 1969. "The Direction of Technological Change: Inducement Mechanisms and Focusing Devices," Economic Development and Cultural Change, University of Chicago Press, vol. 18(1), pages 1-24, Part I Oc.
  10. Kleidon, Allan W, 1986. "Variance Bounds Tests and Stock Price Valuation Models," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 94(5), pages 953-1001, October.
  11. Pakes, Ariel & Griliches, Zvi, 1980. "Patents and R&D at the firm level: A first report," Economics Letters, Elsevier, Elsevier, vol. 5(4), pages 377-381.
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