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Firms’ R&D Dilemma: To Undertake Or Not To Undertake R&D

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Author Info

  • Xulia González
  • Consuelo Pazó

Abstract

It is well known that in most industries a significant proportion of firms do not perform innovative activities. Although empirical studies on the determinants of R&D often have taken this fact into account by considering the dependent variable as a censured one, there is not an explicit theoretical model to explain the zeros. The concern of this letter is to discuss a simple theoretical model where firms simultaneously decide whether to undertake or not R&D activities jointly with the l evel of the R&D investment. We show that a firm performs R&D activities only when its optimal level of R&D expenditure is higher than a threshold. Additionally, we show that both the probability of undertaking R&D activities and the R&D expenditure increase with market power, with the elasticity of demand with respect to quality and with the elasticity of quality with respect to R&D. Finally, from this simple theoretical framework we discuss a suitable econometric model that threats these decisions simultaneously.

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Bibliographic Info

Paper provided by Universidade de Vigo, Departamento de Economía Aplicada in its series Working Papers with number 0208.

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Length: 11 pages
Date of creation: Oct 2002
Date of revision:
Handle: RePEc:vig:wpaper:0208

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Related research

Keywords: R&D; thresholds; Tobit model.;

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References

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  1. A. Mitchell Polinsky & Steven Shavell, 1999. "Corruption and Optimal Law Enforcement," NBER Working Papers 6945, National Bureau of Economic Research, Inc.
  2. Griliches, Zvi, 1990. "Patent Statistics as Economic Indicators: A Survey," Journal of Economic Literature, American Economic Association, vol. 28(4), pages 1661-1707, December.
  3. repec:fth:inseep:9833 is not listed on IDEAS
  4. Nelson, Forrest D., 1977. "Censored regression models with unobserved, stochastic censoring thresholds," Journal of Econometrics, Elsevier, vol. 6(3), pages 309-327, November.
  5. Maria Laura Parisi & Alessandro Sembenelli, 2001. "Is Private R&D Spending Sensitive to Its Price? Empirical Evidence on Panel Data for Italy," Boston College Working Papers in Economics 493, Boston College Department of Economics.
  6. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, vol. 67(3), pages 297-308, June.
  7. Cohen, Wesley M & Klepper, Steven, 1992. "The Anatomy of Industry R&D Intensity Distributions," American Economic Review, American Economic Association, vol. 82(4), pages 773-99, September.
  8. 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.
  9. repec:fth:harver:1473 is not listed on IDEAS
  10. Bruno Crepon & Emmanuel Duguet & Jacques Mairessec, 1998. "Research, Innovation And Productivi[Ty: An Econometric Analysis At The Firm Level," Economics of Innovation and New Technology, Taylor & Francis Journals, vol. 7(2), pages 115-158.
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Cited by:
  1. Elena Cefis, 2008. "The Impact of M&A on Technology Sourcing Strategies," LEM Papers Series 2008/25, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
  2. E. Cefis & M.L. Ghita, 2008. "Post Merger Innovative Patterns in Small and Medium Firms," Working Papers 08-09, Utrecht School of Economics.
  3. Sandro Montresor & Antonio Vezzani, 2014. "On the R&D giants' shoulders: Do FDI help to stand on them?," JRC-IPTS Working Papers on Corporate R&D and Innovation 2014-01, Institute of Prospective Technological Studies, Joint Research Centre.

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