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Dynamic R&D Choice and the Impact of the Firm's Financial Strength

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  • Bettina Peters
  • Mark J. Roberts
  • Van Anh Vuong

Abstract

This article investigates how a firm's financial strength affects its dynamic decision to invest in R&D. We estimate a dynamic model of R&D choice using data for German firms in high-tech manufacturing industries. The model incorporates a measure of the firm's financial strength, derived from its credit rating, which is shown to lead to substantial differences in estimates of the costs and expected long- run benefits from R&D investment. Financially strong firms have a higher probability of generating innovations from their R&D investment, and the innovations have a larger impact on productivity and profits. Averaging across all firms, the long run benefit of investing in R&D equals 6.6 percent of firm value. It ranges from 11.6 percent for firms in a strong financial position to 2.3 percent for firms in a weaker financial position.

Suggested Citation

  • Bettina Peters & Mark J. Roberts & Van Anh Vuong, 2016. "Dynamic R&D Choice and the Impact of the Firm's Financial Strength," NBER Working Papers 22035, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:22035
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    Cited by:

    1. Francesco Manaresi & Nicola Pierri, 2018. "Credit supply and productivity growth," Temi di discussione (Economic working papers) 1168, Bank of Italy, Economic Research and International Relations Area.
    2. Audretsch, David & Hafenstein, Marian & Kritikos, Alexander S. & Schiersch, Alexander, 2018. "Firm Size and Innovation in the Service Sector," IZA Discussion Papers 12035, Institute of Labor Economics (IZA).
    3. Francesco Manaresi & Nicola Pierri, 2018. "Credit supply and productivity growth," BIS Working Papers 711, Bank for International Settlements.

    More about this item

    JEL classification:

    • O3 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights

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