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Quantifying Sunk Costs and Learning Effects in R&D Persistence

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  • Juan A. Máñez Castillejo

    (University of Valencia and ERICES)

  • James H. Love

    (Unviersity of Leeds)

Abstract

This paper analyzes and quantifies the fundamental factors that are likely to cause persistence in performing R&D activities: the existence of sunk costs associated with R&D activities and the process of learning that characterizes this type of activity. We estimate our model with Spanish manufacturing firms for the period 1991-2014. By decomposing the effects of sunk costs and learning effects, we find that both are important determinants of R&D persistence, and that failing to allow for learning systematically overestimates sunk cost effects. Both large firms and SMEs benefit from direct and indirect (via productivity) effects of R&D experience, but in large firms this is more likely to be manifest through productivity improvements while in smaller firms the effect is more skewed towards a direct effect on R&D likelihood. Further, our results suggest that whereas the impact of sunk costs in R&D persistence is greater for large firms than for SMEs, the scope for direct learning from continuous R&D engagement is greater for SMEs than for larger firms.

Suggested Citation

  • Juan A. Máñez Castillejo & James H. Love, 2019. "Quantifying Sunk Costs and Learning Effects in R&D Persistence," Working Papers 1920, Department of Applied Economics II, Universidad de Valencia.
  • Handle: RePEc:eec:wpaper:1920
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    More about this item

    Keywords

    R&D persistence; sunk costs; learning effects;
    All these keywords.

    JEL classification:

    • O32 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Management of Technological Innovation and R&D
    • L60 - Industrial Organization - - Industry Studies: Manufacturing - - - General

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