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Intrinsic Business Cycles with Pro-Cyclical R&D

  • Patrick Francois

    ()

    (University of British Columbia)

  • Huw Lloyd-Ellis

    ()

    (Queen's University)

Recent empirical work finds that R&D expenditures are quite procyclical, even for firms that are not redit-constrained during downturns. This has been taken as strong evidence against Schumpeterian-style theories of business cycles that emphasize the idea that downturns in production may be good times to allocate labor towards innovative activities. Here we argue that the procyclicality of R&D investment is, in fact, quite consistent with at least one of these theories. In our analysis, we emphasize three key features of R&D investment relative to other types of innovative activity: (1) it uses knowledge intensively, (2) it is a long-term investment with uncertain applications and (3) it suffers from diminishing returns over time.

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File URL: http://qed.econ.queensu.ca/working_papers/papers/qed_wp_1102.pdf
File Function: First version 2006
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Paper provided by Queen's University, Department of Economics in its series Working Papers with number 1102.

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Length: 28 pages
Date of creation: Jan 2006
Date of revision:
Handle: RePEc:qed:wpaper:1102
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  1. Klaus, WAELDE, 2003. "Endogenous growth cycles," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 2004012, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES), revised 15 Mar 2004.
  2. Gadi Barlevy, 2005. "Why don't recessions encourage more R&D spending?," Chicago Fed Letter, Federal Reserve Bank of Chicago, issue Nov.
  3. Nickell, S. & Nicolitasa, D. & Patterson, M., 1995. "Does Doing Badly Encourage Management Innovation?," Economics Series Working Papers 99175, University of Oxford, Department of Economics.
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