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Sources of Finance, R&D Investment and Productivity: Correlation or Causality?

  • Lööf, Hans

    ()

    (Centre of Excellence for Science and Innovation Studies, CESIS)

  • Heshmati, Almas

    ()

    (Techno-Economics Policy Program, College of Engineering)

In general there is agreement about the positive impacts of R&D on performance of firms measured as productivity, profitability and growth. However, the opposite relationship is less obvious and very little attention has been paid on examining the feedback from performance on investment. This study is an attempt to contribute to the empirical analysis of the causal relationship between investment and performance. We examine the interaction between a number of financial indicators represented by investments in R&D and tangible capital and a number of performance variables including sales, value added, profit, cash flow, capital structure and employment on R&D and physical capital investments. Empirical results are based on a large panel data set of Swedish manufacturing firms over the period 1992-2000. The results show evidence of weak feedback effects from performance on investment.

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Paper provided by Royal Institute of Technology, CESIS - Centre of Excellence for Science and Innovation Studies in its series Working Paper Series in Economics and Institutions of Innovation with number 11.

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Length: 25 pages
Date of creation: 24 Sep 2004
Date of revision:
Publication status: Forthcoming in ICFAI Journal of Industrial Economics, 2006.
Handle: RePEc:hhs:cesisp:0011
Contact details of provider: Postal: CESIS - Centre of Excellence for Science and Innovation Studies, Royal Institute of Technology, SE-100 44 Stockholm, Sweden
Phone: +46 8 790 95 63
Web page: http://www.infra.kth.se/cesis/

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  1. Blundell, R. & Bond, S., 1995. "Initial Conditions and Moment Restrictions in Dynamic Panel Data Models," Economics Papers 104, Economics Group, Nuffield College, University of Oxford.
  2. 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.
  3. Kenneth Arrow, 1962. "Economic Welfare and the Allocation of Resources for Invention," NBER Chapters, in: The Rate and Direction of Inventive Activity: Economic and Social Factors, pages 609-626 National Bureau of Economic Research, Inc.
  4. Baumol, William J & Wolff, Edward N, 1983. " Feedback from Productivity Growth to R & D," Scandinavian Journal of Economics, Wiley Blackwell, vol. 85(2), pages 147-57.
  5. Ward Brown, 1997. "R&D Intensity and Finance: Are Innovative Firms Financially Constrained?," FMG Discussion Papers dp271, Financial Markets Group.
  6. Granger, C W J, 1969. "Investigating Causal Relations by Econometric Models and Cross-Spectral Methods," Econometrica, Econometric Society, vol. 37(3), pages 424-38, July.
  7. Arellano, Manuel & Bond, Stephen, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Wiley Blackwell, vol. 58(2), pages 277-97, April.
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