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Investment, R&D and financial constraints in Britain and Germany

  • Steve Bond

    ()

    (Institute for Fiscal Studies and Nuffield College, Oxford)

  • Dietmar Harhoff

    (Institute for Fiscal Studies and University of Munich)

  • John Van Reenen

    (Institute for Fiscal Studies)

This paper tests for the importance of cash flow on investment in fixed capital and R&D using firm-level panel data in two countries between 1985 and 1994. For German firms, cash flow is not informative in simple econometric models of fixed investment or R&D. In identical pecifications for British firms, cash flow is informative about investment, although not about the level of R&D spending conditional on the R&D participation decision. In the UK, we also find that investment is less sensitive to cash flow for R&D-performing firms, and that cash flow predicts whether firms perform R&D or not. We confirm that these differences do not simply reflect a greater role for current cash flow in forecasting future sales. These results suggest that financial constraints are more significant in Britain, that they affect the decision to engage in R&D rather than the level of R&D spending by participants, and that consequently the British firms that do engage in R&D are a self-selected group where financing constraints tend to be less binding.

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File URL: http://www.ifs.org.uk/wps/wp9905.pdf
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Paper provided by Institute for Fiscal Studies in its series IFS Working Papers with number W99/05.

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Length: 55 pp.
Date of creation: 30 Mar 1999
Date of revision:
Handle: RePEc:ifs:ifsewp:99/05
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