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Financial Constraints and the Cyclicality of R&D Investment:Evidence from Slovenia

  • Simona Bovha-Padilla
  • Joze P. Damijan
  • Jozef Konings

This paper uses firm level data to show how R&D investment responds to shocks in sales growth in credit constrained firms. A credit constrained firm has to rely on its cash flow and borrowing capacity to survive its short-run liquidity shock when hit by a negative shock. This reduces the possibility for further borrowing in order to invest in non-tangible long term R&D, hence a negative shock should hit R&D investments more in firms that are more credit constrained. We find that in financially constrained firms sales growth is positively associated with R&D investment, suggesting procyclical behavior of R&D investment in credit constrained firms. In contrast, we find that in firms with no financial constraints R&D investment is negatively correlated with sales growth, suggesting countercyclical behavior of R&D, consistent with the Schumpeterian idea of restructuring. Furthermore, we find that the firm level response in R&D investment to sales growth is stronger in firms that are more financially dependent, such as firms that are no part of a multinational, firms not receiving subsidies or firms with less collateral.

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File URL: http://www.econ.kuleuven.be/licos/publications/dp/dp239.pdf
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Paper provided by LICOS - Centre for Institutions and Economic Performance, KU Leuven in its series LICOS Discussion Papers with number 23909.

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Date of creation: 2009
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Handle: RePEc:lic:licosd:23909
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  1. Damijan, Joze P. & Knell, Mark & Majcen, Boris & Rojec, Matija, 2003. "The role of FDI, R&D accumulation and trade in transferring technology to transition countries: evidence from firm panel data for eight transition countries," Economic Systems, Elsevier, vol. 27(2), pages 189-204, June.
  2. Matthew Rafferty, 2003. "Do Business Cycles Alter the Composition of Research and Development Expenditures?," Contemporary Economic Policy, Western Economic Association International, vol. 21(3), pages 394-405, 07.
  3. Aghion, Philippe & Askenazy, Philippe & Berman, Nicolas & Cette, Gilbert & Eymard, Laurent, 2012. "Credit Constraints and the Cyclicality of R&D Investment: Evidence from France," Scholarly Articles 12490632, Harvard University Department of Economics.
  4. Griliches, Zvi, 1990. "Patent Statistics as Economic Indicators: A Survey," Journal of Economic Literature, American Economic Association, vol. 28(4), pages 1661-1707, December.
  5. Philippe Aghion & Peter Howitt, 1997. "Endogenous Growth Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262011662, June.
  6. Joseph E. Stiglitz, 1993. "Endogenous Growth and Cycles," NBER Working Papers 4286, National Bureau of Economic Research, Inc.
  7. Patrick Francois & Huw Lloyd-Ellis, 2003. "Animal Spirits Through Creative Destruction," American Economic Review, American Economic Association, vol. 93(3), pages 530-550, June.
  8. Himmelberg, Charles P & Petersen, Bruce C, 1994. "R&D and Internal Finance: A Panel Study of Small Firms in High-Tech Industries," The Review of Economics and Statistics, MIT Press, vol. 76(1), pages 38-51, February.
  9. Schneider, Cedric & Veugelers, Reinhilde, 2008. "On Young Innovative Companies: Why they matter and how (not) to policy support them," Working Papers 04-2008, Copenhagen Business School, Department of Economics.
  10. Bean, C., 1989. "Endogenous Growth And The Procyclical Behaviour Of Productivity," Papers 369, London School of Economics - Centre for Labour Economics.
  11. Matthew Rafferty, 2003. "Do Business Cycles Influence Long-Run Growth? The Effect of Aggregate Demand on Firm-Financed R&D Expenditures," Eastern Economic Journal, Eastern Economic Association, vol. 29(4), pages 607-618, Fall.
  12. Gadi Barlevy, 2004. "On the Timing of Innovation in Stochastic Schumpeterian Growth Models," NBER Working Papers 10741, National Bureau of Economic Research, Inc.
  13. Walde, Klaus & Woitek, Ulrich, 2004. "R&D expenditure in G7 countries and the implications for endogenous fluctuations and growth," Economics Letters, Elsevier, vol. 82(1), pages 91-97, January.
  14. Saint-Paul, Gilles, 1992. "Productivity Growth and the Structure of the Business Cycle," CEPR Discussion Papers 709, C.E.P.R. Discussion Papers.
  15. repec:fth:harver:1473 is not listed on IDEAS
  16. Jože P. Damijan & Mark Knell, 2005. "How Important Is Trade and Foreign Ownership in Closing the Technology Gap? Evidence from Estonia and Slovenia," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 141(2), pages 271-295, July.
  17. Degryse, Hans & de Jong, Abe, 2006. "Investment and internal finance: Asymmetric information or managerial discretion?," International Journal of Industrial Organization, Elsevier, vol. 24(1), pages 125-147, January.
  18. Gadi Barlevy, 2007. "On the Cyclicality of Research and Development," American Economic Review, American Economic Association, vol. 97(4), pages 1131-1164, September.
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