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Interest rates, R&D investment and the distortionary effects of R&D incentives

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Abstract

This paper conducts the first analysis of how interest rates are related to firms' allocation of investment between R&D and non-R&D activities and how R&D incentives alter this relationship. It theoretically predicts that if firms receive incentives mostly in the form of grants and subsidies that reduce their dependence on external finance, their share of R&D spending increases (decreases) during a credit tightening (easing). Conversely, if tax credits are the primary incentive, rms' decrease (increase) their share of R&D spending during a credit tightening (easing). The paper demonstrates empirical support for these predictions by using rm-level financial and sector-level R&D incentives data and a unique methodology that focuses on the within firm allocation of investment.

Suggested Citation

  • Uluc Aysun & Zeynep Kabukcuoglu, 2017. "Interest rates, R&D investment and the distortionary effects of R&D incentives," Villanova School of Business Department of Economics and Statistics Working Paper Series 37, Villanova School of Business Department of Economics and Statistics.
  • Handle: RePEc:vil:papers:37
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    Cited by:

    1. Uluc Aysun, 2019. "Volatility costs of R&D," Working Papers 2019-02, University of Central Florida, Department of Economics.
    2. repec:eee:enepol:v:130:y:2019:i:c:p:438-447 is not listed on IDEAS

    More about this item

    Keywords

    R&D; finance; grants; tax credits; COMPUSTAT;

    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • O38 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Government Policy

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