IDEAS home Printed from https://ideas.repec.org/a/kap/sbusec/v48y2017i2d10.1007_s11187-016-9776-z.html
   My bibliography  Save this article

R&D profitability: the role of risk and Knightian uncertainty

Author

Listed:
  • Sara Amoroso

    (JRC - European Commission)

  • Pietro Moncada-Paternò-Castello

    (JRC - European Commission)

  • Antonio Vezzani

    (JRC - European Commission)

Abstract

This paper provides the first empirical attempt of linking firms’ profits and investment in R&D revisiting Knight’s (Risk, uncertainty and profit, Hart, Schaffner & Marx, Boston, 1921) distinction between uncertainty and risk. Along with the risky profit-maximising scenario, identifying a second, off-setting, unpredictable bias that leads to heterogeneous returns to R&D investments is crucial to fully understand the drivers of corporate profits. Consistently with the Knightian theory that relates risk to profitability, we model the impact of risk and uncertainty on profits and provide a first empirical attempt to model the effect of ambiguity, a particular type of uncertainty, on R&D returns.

Suggested Citation

  • Sara Amoroso & Pietro Moncada-Paternò-Castello & Antonio Vezzani, 2017. "R&D profitability: the role of risk and Knightian uncertainty," Small Business Economics, Springer, vol. 48(2), pages 331-343, February.
  • Handle: RePEc:kap:sbusec:v:48:y:2017:i:2:d:10.1007_s11187-016-9776-z
    DOI: 10.1007/s11187-016-9776-z
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1007/s11187-016-9776-z
    File Function: Abstract
    Download Restriction: Access to full text is restricted to subscribers.

    File URL: https://libkey.io/10.1007/s11187-016-9776-z?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Andreas Freytag & Roy Thurik, 2010. "Entrepreneurship and its Determinants in a Cross-Country Setting," Springer Books, in: Andreas Freytag & Roy Thurik (ed.), Entrepreneurship and Culture, chapter 0, pages 157-170, Springer.
    2. Loomes, Graham & Moffatt, Peter G & Sugden, Robert, 2002. "A Microeconometric Test of Alternative Stochastic Theories of Risky Choice," Journal of Risk and Uncertainty, Springer, vol. 24(2), pages 103-130, March.
    3. Mehra, Rajnish & Prescott, Edward C., 1985. "The equity premium: A puzzle," Journal of Monetary Economics, Elsevier, vol. 15(2), pages 145-161, March.
    4. Geoffrey Hodgson, 2011. "The Eclipse of the Uncertainty Concept in Mainstream Economics," Journal of Economic Issues, Taylor & Francis Journals, vol. 45(1), pages 159-176.
    5. Tim Bollerslev & George Tauchen & Hao Zhou, 2009. "Expected Stock Returns and Variance Risk Premia," Review of Financial Studies, Society for Financial Studies, vol. 22(11), pages 4463-4492, November.
    6. Hurdle, Gloria J, 1974. "Leverage, Risk, Market Structure and Profitability," The Review of Economics and Statistics, MIT Press, vol. 56(4), pages 478-485, November.
    7. Zengjing Chen & Larry Epstein, 2002. "Ambiguity, Risk, and Asset Returns in Continuous Time," Econometrica, Econometric Society, vol. 70(4), pages 1403-1443, July.
    8. Dirk Czarnitzki & Andrew A. Toole, 2011. "Patent Protection, Market Uncertainty, and R&D Investment," The Review of Economics and Statistics, MIT Press, vol. 93(1), pages 147-159, February.
    9. Vivek Ghosal & Yang Ye, 2015. "Uncertainty and the employment dynamics of small and large businesses," Small Business Economics, Springer, vol. 44(3), pages 529-558, March.
    10. Markus C. Becker, 2004. "Organizational routines: a review of the literature," Industrial and Corporate Change, Oxford University Press, vol. 13(4), pages 643-678, August.
    11. Mohammed Abdellaoui & Aurelien Baillon & Laetitia Placido & Peter P. Wakker, 2011. "The Rich Domain of Uncertainty: Source Functions and Their Experimental Implementation," American Economic Review, American Economic Association, vol. 101(2), pages 695-723, April.
    12. Mariana Mazzucato & Massimiliano Tancioni, 2013. "R&D, Patents and Stock Return Volatility," Economic Complexity and Evolution, in: Andreas Pyka & Esben Sloth Andersen (ed.), Long Term Economic Development, edition 127, pages 341-362, Springer.
    13. Gajdos, T. & Tallon, J.-M. & Vergnaud, J.-C., 2008. "Representation and aggregation of preferences under uncertainty," Journal of Economic Theory, Elsevier, vol. 141(1), pages 68-99, July.
    14. Tversky, Amos & Kahneman, Daniel, 1992. "Advances in Prospect Theory: Cumulative Representation of Uncertainty," Journal of Risk and Uncertainty, Springer, vol. 5(4), pages 297-323, October.
    15. Sabien Dobbelaere & Roland Iwan Luttens & Bettina Peters, 2008. "Starting an R&D Project under Uncertainty," DRUID Working Papers 08-09, DRUID, Copenhagen Business School, Department of Industrial Economics and Strategy/Aalborg University, Department of Business Studies.
    16. Huang, Rocco R., 2008. "Tolerance for uncertainty and the growth of informationally opaque industries," Journal of Development Economics, Elsevier, vol. 87(2), pages 333-353, October.
    17. Acs, Zoltan J. & Audretsch, David B., 1987. "Innovation in large and small firms," Economics Letters, Elsevier, vol. 23(1), pages 109-112.
    18. Subal Kumbhakar & Raquel Ortega-Argilés & Lesley Potters & Marco Vivarelli & Peter Voigt, 2012. "Corporate R&D and firm efficiency: evidence from Europe’s top R&D investors," Journal of Productivity Analysis, Springer, vol. 37(2), pages 125-140, April.
    19. Lubos PÁstor & Veronesi Pietro, 2003. "Stock Valuation and Learning about Profitability," Journal of Finance, American Finance Association, vol. 58(5), pages 1749-1790, October.
    20. Zvi Griliches, 1998. "R&D and Productivity: The Econometric Evidence," NBER Books, National Bureau of Economic Research, Inc, number gril98-1, November.
    21. J. Tobin, 1958. "Liquidity Preference as Behavior Towards Risk," Review of Economic Studies, Oxford University Press, vol. 25(2), pages 65-86.
    22. Nadiri, M.I., 1993. "Innovations and Technological Spillovers," Working Papers 93-31, C.V. Starr Center for Applied Economics, New York University.
    23. Bronk, Richard, 2011. "Uncertainty, modelling monocultures and the financial crisis," LSE Research Online Documents on Economics 37970, London School of Economics and Political Science, LSE Library.
    24. Guido Cozzi & Paolo Giordani, 2011. "Ambiguity attitude, R&D investments and economic growth," Journal of Evolutionary Economics, Springer, vol. 21(2), pages 303-319, May.
    25. Pennings, Enrico & Sereno, Luigi, 2011. "Evaluating pharmaceutical R&D under technical and economic uncertainty," European Journal of Operational Research, Elsevier, vol. 212(2), pages 374-385, July.
    26. Daniel McFadden, 2001. "Economic Choices," American Economic Review, American Economic Association, vol. 91(3), pages 351-378, June.
    27. Miao, Jianjun & Wang, Neng, 2011. "Risk, uncertainty, and option exercise," Journal of Economic Dynamics and Control, Elsevier, vol. 35(4), pages 442-461, April.
    28. Andre Palma & Moshe Ben-Akiva & David Brownstone & Charles Holt & Thierry Magnac & Daniel McFadden & Peter Moffatt & Nathalie Picard & Kenneth Train & Peter Wakker & Joan Walker, 2008. "Risk, uncertainty and discrete choice models," Marketing Letters, Springer, vol. 19(3), pages 269-285, December.
      • André de Palma & Moshe Ben-Akiva & David Brownstone & Charles Holt & Thierry Magnac & Daniel McFadden & Peter Moffatt & Nathalie Picard & Kenneth Train & Peter Wakker & Joan Walker, 2008. "Risk, Uncertainty and Discrete Choice Models," THEMA Working Papers 2008-02, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
    29. Gilboa, Itzhak & Schmeidler, David, 1989. "Maxmin expected utility with non-unique prior," Journal of Mathematical Economics, Elsevier, vol. 18(2), pages 141-153, April.
    30. Donald Kuratko & Michael Morris & Minet Schindehutte, 2015. "Understanding the dynamics of entrepreneurship through framework approaches," Small Business Economics, Springer, vol. 45(1), pages 1-13, June.
    31. M. Ishaq Nadiri, 1993. "Innovations and Technological Spillovers," NBER Working Papers 4423, National Bureau of Economic Research, Inc.
    32. Daniel Ellsberg, 1961. "Risk, Ambiguity, and the Savage Axioms," The Quarterly Journal of Economics, Oxford University Press, vol. 75(4), pages 643-669.
    33. Harry Markowitz, 1952. "Portfolio Selection," Journal of Finance, American Finance Association, vol. 7(1), pages 77-91, March.
    34. 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.
    35. Sara Amoroso & Pietro Moncada-Paternò-Castello & Antonio Vezzani, 2017. "R&D profitability: the role of risk and Knightian uncertainty," Small Business Economics, Springer, vol. 48(2), pages 331-343, February.
    36. Ulrich Doraszelski & Jordi Jaumandreu, 2013. "R&D and Productivity: Estimating Endogenous Productivity," Review of Economic Studies, Oxford University Press, vol. 80(4), pages 1338-1383.
    37. Bronwyn H. Hall & Pietro Moncada-Paternò-Castello & Sandro Montresor & Antonio Vezzani, 2016. "Financing constraints, R&D investments and innovative performances: new empirical evidence at the firm level for Europe," Economics of Innovation and New Technology, Taylor & Francis Journals, vol. 25(3), pages 183-196, April.
    38. Alex Coad & Rekha Rao, 2010. "Firm growth and R&D expenditure," Economics of Innovation and New Technology, Taylor & Francis Journals, vol. 19(2), pages 127-145.
    39. Reinganum, Marc R., 1981. "Misspecification of capital asset pricing : Empirical anomalies based on earnings' yields and market values," Journal of Financial Economics, Elsevier, vol. 9(1), pages 19-46, March.
    40. Hélène Dernis & Mafini Dosso & Fernando Hervas & Valentine Millot & Mariagrazia Squicciarini & Antonio Vezzani, 2015. "World Corporate Top R&D Investors: Innovation and IP bundles," JRC Working Papers JRC94932, Joint Research Centre (Seville site).
    41. Nicholas Bloom & John Van Reenen, 2002. "Patents, Real Options and Firm Performance," Economic Journal, Royal Economic Society, vol. 112(478), pages 97-116, March.
    42. Fernando Hervas Soriano & Alexander Tuebke & Nicola Grassano & Alexander Coad, 2015. "The 2015 EU Survey on Industrial R&D Investment Trends," JRC Working Papers JRC98214, Joint Research Centre (Seville site).
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Vanja Grozdić & Branislav Marić & Mladen Radišić & Jarmila Šebestová & Marcin Lis, 2020. "Capital Investments and Manufacturing Firms’ Performance: Panel-Data Analysis," Sustainability, MDPI, Open Access Journal, vol. 12(4), pages 1-18, February.
    2. García-Vega, María & Kneller, Richard & Stiebale, Joel, 2021. "Labor market reform and innovation: Evidence from Spain," Research Policy, Elsevier, vol. 50(5).
    3. James Boles & Albert N. Link, 2017. "On the R&D/marketing interface in knowledge intensive entrepreneurial firms," International Entrepreneurship and Management Journal, Springer, vol. 13(3), pages 943-952, September.
    4. Sara Amoroso & Pietro Moncada-Paternò-Castello & Antonio Vezzani, 2017. "R&D profitability: the role of risk and Knightian uncertainty," Small Business Economics, Springer, vol. 48(2), pages 331-343, February.
    5. Mafini Dosso & Ben R Martin & Pietro Moncada-Paternò-Castello, 2018. "Towards evidence-based industrial research and innovation policy," Science and Public Policy, Oxford University Press, vol. 45(2), pages 143-150.
    6. Ghosal, Vivek & Ye, Yang, 2019. "The impact of uncertainty on the number of businesses," Journal of Economics and Business, Elsevier, vol. 105(C).
    7. Romeo-Victor Ionescu, 2016. "Research, Innovation and Development vs Regional Disparities across the European Union," Acta Universitatis Danubius. OEconomica, Danubius University of Galati, issue 12(2), pages 161-173, April.
    8. Sara Amoroso, 2015. "Profits, R&D and labour: Breaking the law of diminishing returns to labour," JRC Working Papers on Corporate R&D and Innovation 2015-10, Joint Research Centre (Seville site).
    9. CATTARUZZO Sebastiano, 2020. "On R&D sectoral intensities and convergence clubs," JRC Working Papers on Corporate R&D and Innovation 2020-01, Joint Research Centre (Seville site).
    10. Tubadji, Annie & Nijkamp, Peter & Santarelli, Enrico, 2017. "Shacklean Uncertainty and Cultural Embeddedness as Innovation Constraints in the UK," GLO Discussion Paper Series 111, Global Labor Organization (GLO).
    11. Peng, Fei & Peng, Langchuan & Wang, Zheng, 2021. "How do VAT reforms in the service sectors impact TFP in the manufacturing sector: Firm-level evidence from China," Economic Modelling, Elsevier, vol. 99(C).
    12. repec:dug:journl:y:2016:i:2:p:161-173 is not listed on IDEAS

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. André, Eric, 2014. "Optimal portfolio with vector expected utility," Mathematical Social Sciences, Elsevier, vol. 69(C), pages 50-62.
    2. Jianjun Miao & Bin Wei & Hao Zhou, 2019. "Ambiguity Aversion and the Variance Premium," Quarterly Journal of Finance (QJF), World Scientific Publishing Co. Pte. Ltd., vol. 9(02), pages 1-36, June.
    3. Izhakian, Yehuda, 2020. "A theoretical foundation of ambiguity measurement," Journal of Economic Theory, Elsevier, vol. 187(C).
    4. Gijs van de Kuilen & Peter P. Wakker, 2011. "The Midweight Method to Measure Attitudes Toward Risk and Ambiguity," Management Science, INFORMS, vol. 57(3), pages 582-598, March.
    5. Qi, Jin & Sim, Melvyn & Sun, Defeng & Yuan, Xiaoming, 2016. "Preferences for travel time under risk and ambiguity: Implications in path selection and network equilibrium," Transportation Research Part B: Methodological, Elsevier, vol. 94(C), pages 264-284.
    6. Konstantinos Georgalos, 2016. "Dynamic decision making under ambiguity," Working Papers 112111041, Lancaster University Management School, Economics Department.
    7. Jakusch, Sven Thorsten, 2017. "On the applicability of maximum likelihood methods: From experimental to financial data," SAFE Working Paper Series 148, Leibniz Institute for Financial Research SAFE.
    8. Guo, Liang, 2013. "Determinants of credit spreads: The role of ambiguity and information uncertainty," The North American Journal of Economics and Finance, Elsevier, vol. 24(C), pages 279-297.
    9. Hall, Bronwyn H. & Mairesse, Jacques & Mohnen, Pierre, 2010. "Measuring the Returns to R&D," Handbook of the Economics of Innovation, in: Bronwyn H. Hall & Nathan Rosenberg (ed.), Handbook of the Economics of Innovation, edition 1, volume 2, chapter 0, pages 1033-1082, Elsevier.
    10. Stephen Dimmock & Roy Kouwenberg & Olivia Mitchell & Kim Peijnenburg, 2015. "Estimating ambiguity preferences and perceptions in multiple prior models: Evidence from the field," Journal of Risk and Uncertainty, Springer, vol. 51(3), pages 219-244, December.
    11. Chiaki Hara & Toshiki Honda, 2018. "ImpliedAmbiguity:Mean-Variance Efficiency andPricingErrors," KIER Working Papers 1004, Kyoto University, Institute of Economic Research.
    12. Massimo Guidolin & Francesca Rinaldi, 2013. "Ambiguity in asset pricing and portfolio choice: a review of the literature," Theory and Decision, Springer, vol. 74(2), pages 183-217, February.
    13. Jakusch, Sven Thorsten & Meyer, Steffen & Hackethal, Andreas, 2019. "Taming models of prospect theory in the wild? Estimation of Vlcek and Hens (2011)," SAFE Working Paper Series 146, Leibniz Institute for Financial Research SAFE.
    14. Grimpe, Christoph & Sofka, Wolfgang, 2007. "Search Patterns and Absorptive Capacity: A Comparison of Low- and High-Technology Firms from Thirteen European Countries," ZEW Discussion Papers 07-062, ZEW - Leibniz Centre for European Economic Research.
    15. Fulvio Castellacci, 2007. "Technological regimes and sectoral differences in productivity growth ," Industrial and Corporate Change, Oxford University Press, vol. 16(6), pages 1105-1145, December.
    16. Haven, Emmanuel & Khrennikova, Polina, 2018. "A quantum-probabilistic paradigm: Non-consequential reasoning and state dependence in investment choice," Journal of Mathematical Economics, Elsevier, vol. 78(C), pages 186-197.
    17. Stephen G. Dimmock & Roy Kouwenberg & Peter P. Wakker, 2016. "Ambiguity Attitudes in a Large Representative Sample," Management Science, INFORMS, vol. 62(5), pages 1363-1380, May.
    18. Gao, Yongling & Driouchi, Tarik & Bennett, David J., 2018. "Ambiguity aversion in buyer-seller relationships: A contingent-claims and social network explanation," International Journal of Production Economics, Elsevier, vol. 200(C), pages 50-67.
    19. Nathaniel T. Wilcox, 2017. "Random expected utility and certainty equivalents: mimicry of probability weighting functions," Journal of the Economic Science Association, Springer;Economic Science Association, vol. 3(2), pages 161-173, December.
    20. Ning Du & David V. Budescu, 2005. "The Effects of Imprecise Probabilities and Outcomes in Evaluating Investment Options," Management Science, INFORMS, vol. 51(12), pages 1791-1803, December.

    More about this item

    Keywords

    R&D investment; Operating profits; Uncertainty; Ambiguity; Risk premium;
    All these keywords.

    JEL classification:

    • O30 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - General
    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:kap:sbusec:v:48:y:2017:i:2:d:10.1007_s11187-016-9776-z. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: . General contact details of provider: http://www.springer.com .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.