R&D investment,cash holdings and the financial crisis: evidence from Korean corporate data

This article examines the real effects of the financial crisis in 2008 on corporate R&D investment by analyzing firm-level panel data from 2005 to 2011 obtained from KIS-VALUE, a Korean corporate finance database. I estimate a dynamic panel model of R&D investment that includes an after-crisis dummy to reflect the effects of the external finance supply shock after the financial crisis, an interaction term of the dummy and cash holdings to measure the marginal effect of cash holdings after the crisis, investment opportunities (sales and the q ratio) and financial positions as the debt-equity ratio. The estimation implies a negative yet relatively small impact of the credit supply shock from the financial crisis on R&D investment and the mitigation of the negative impacts by cash holdings after the onset of the financial crisis, whereas the data show decreasing R&D investment and sales for the whole period. Based on the data and the estimation, I find that firms were able to lessen the pressure from diminishing market demand before the crisis using external finance, but they had to use internal financial sources after the crisis smooth R&D investment.     

ASYMMETRIC EFFECTS OF THE BUSINESS CYCLE ON FIRM-FINANCED R&D

Abstract

Business cycles might affect the ability of firms to finance R&D, since firms rely on cash flow to finance most R&D activities. However, business cycles also influence the incentive to perform R&D. The opportunity cost of funds devoted to R&D falls during recessions, since the return on production will likely be lower than during an expansion. During recessions, this provides firms with an incentive to redistribute an existing pool of funds away from production and towards R&D projects. The changes in the size and distribution of the pool may also be asymmetric across the business cycle. For example, cash-flow constraints are more likely to bind during recessions than expansions. This paper finds strong evidence for the cash-flow effect, but not the opportunity-cost effect. This means that R&D is pro-cyclical, but smoothing out the business cycle will actually lead to reduced R&D, since the duration of expansions exceeds the duration of recessions.     

How do housing cycles influence listed firms’ R&D investment: evidence from the collateral channel

ABSTRACT

Firm innovation is essential to long-run economic growth. Financially constrained R&D firms may use firm-owned properties as collateral to finance their R&D projects. Therefore, the housing price cycle can affect firms’ R&D investment through influencing their real estate value. By examining listed R&D firms during the housing boom period 2002–2006 in the U.S., we find that a $1 increase in real estate value leads a firm to increase its R&D investment by $0.38. We also find that this collateral effect is more pronounced among financially constrained R&D firms than that among unconstrained ones. Additionally, we examine the housing bust period 2008–2012, and find that real estate depreciation retarded R&D investment, especially among constrained R&D firms.     

Industrial districts and financial constraints to innovation

Informational frictions between borrowers and lenders are particularly acute for innovative firms undertaking high‐risk projects. As a consequence, banks may end up denying credit to them. However, the literature on relationship finance predicts that a closer relationship between credit suppliers and obligors is deemed to alleviate information asymmetries, hence preventing credit rationing from occurring. The question of whether such situations also apply to innovative firms has so far remained relatively unexplored. Using a cross‐section of Italian manufacturing firms, I find that credit constraints appear to be more severe for firms undertaking innovative activities, although such effects are weaker when measures of R&D intensity are included. The empirical analysis also shows that firms located in an industrial district have easier access to external finance. If I move to consider firms engaged in substantial R&D activities located in a district, results suggest that they can benefit from better financial conditions.     

Firm's objective function and product and process R&D

Firms undertake different kinds of R&D activities. They do product R&D (R&D aimed at improving the quality of existing products, and creating new products). They also do process R&D (R&D aimed at lowering the cost of making existing and new products). Moreover, firms often do both product and process R&D simultaneously. As far as the objective of firms is concerned, this need not be limited to profit-maximization only. Rather, firms may have a broader objective, where they care about profits as well as consumer surplus. This paper studies effects of a firm having a general objective function (that takes into consideration both profits and consumer surplus) on its product and process R&D choices, and corresponding implications.I consider product and process R&D choices of firms in an infinite horizon set-up with discrete time. Firms in my framework can simultaneously do both product and process R&D in every period, face a discrete-choice model of consumer demand with vertical product differentiation, and maximize a discounted, weighted sum of their profits and consumer surplus over the infinite time horizon.I show how process and product R&D differ from each other in my framework, and the role of a firm's objective function in this regard. I compare process and product R&D choices across firms that differ in their objective function, and illustrate effects of providing general R&D subsidies (subsidies given for any R&D, regardless of whether it is product or process R&D) to firms. I also characterize how in my framework, the choice of process R&D in total R&D — R&D composition — by an individual firm varies over time, and how process and product R&D choices, process and product R&D productivity, and the choice of R&D composition vary across firms that differ in size but are otherwise similar.     

Property rights protection and corporate R&D: Evidence from China

Following the recent literature on institutions and economic growth, we examine the effects of property rights protection on corporate R&D. Using a unique 2003 World Bank survey of over 2400 firms in 18 Chinese cities, we obtain the following findings: (1) property rights protection is positively and significantly related to corporate R&D activity (for both process and product R&D); (2) government services and helping hand are conducive to corporate R&D, while informal payments to government officials are not; and (3) government ownership of firms and direct appointment of CEOs are negatively associated with corporate R&D activities. We also find that corporate R&D is positively related to firm size, and access to finance, but negatively related to product market competition and firm age.     

Does issuing equity help R&D activity? Evidence from unlisted Italian high-tech manufacturing firms

This paper evaluates the causal effect of issuing equities on the probability that a firm engages in R&D activity. Equity is a better source of external finance than debt for innovation. It does not require collateral, does not exacerbate moral hazard problems connected with the substitution of high-risk for low-risk projects, quite common when using debt, and, unlike debt, does not increase the probability of bankruptcy; equity also allows investors to reap the entire benefit of the returns of successful innovative projects. This paper focuses on high-tech firms for which asymmetric information problems are more pervasive. Implementing an instrumental variable estimation, we find that issuing equity increases the probability that the firm has R&D expenditures by 30–40%. We detect considerable heterogeneity in this effect: the impact of issuing equity is significant only for small, young and more highly leveraged high-tech firms. We also find interesting evidence that issuing equity increases R&D expenditures in relation to sales.     

Driving forces for research and development strategies: an empirical analysis based on firm-level panel data

This paper investigates empirically different ways to organize research and development (R&D) within Swiss firms. Based on a longitudinal data set comprising three cross-sections (1999, 2002, and 2005) of the Swiss Innovation Survey, four different types of R&D strategies could have been separated; firms combine in-house R&D with R&D co-operations (coop) or in-house R&D with external R&D (buy), or they conduct in-house R&D, external R&D, and R&D co-operations (mixed), or they exclusively rely on in-house R&D (make). It is the aim of this paper to understand what drive firms to go for different strategies. Based on econometric estimations controlling for correlations between the dependent variables and endogeneity among the independent variables, it was found that concepts related to the absorptive capacity, incoming spillovers, and appropriability, the importance of different knowledge sources, the competitive environment, costs, and skill aspects as well as technological uncertainty are essential factors to determine a firm's decision to choose a specific way to organize R&D.     

Subsidizing cooperative and noncooperative R&D in duopoly with spillovers

Comparing the effect on private R&D investments of allowing firms to cooperate in R&D with that of providing R&D subsidies reveals that in general the latter policy is more effective than the former in promoting R&D activity. Analyzing the implementation of both policies simultaneously reveals that subsidizing cooperative and noncooperative R&D leads to the same market outcome. The preferred R&D-stimulating policy is to subsidize optimally an agreement according to which firms only share the outcomes of their independent research.     

Signalling,Disclosure And The Implications Of Financial Structure For Uk Corporate R&D ∗

This paper investigates the impact of R&D disclosure and finance variables on the level of R&D expenditures. The question addressed is: what is the impact of changes in disclosure requirements on the relationship between R&D expenditure and the financing of firms? The question is motivated by the possible signalling role that elective disclosure may have had prior to changes in accounting practices to ensure R&D disclosure.     

Unsuccessful patent application and cooperative R&;D

We show that uncertainty in patent approvals may induce the firms to do cooperative R&D. With an exogenous probability of success in patent application, we show that, if all firms apply for patents under non-cooperative R&D, the firms prefer cooperative R&D than non-cooperative R&D for moderate (high) probabilities of success in patent applications, if the cost of patenting is small (large). We also show the implications of entry of non-innovating firms and endogenous probability of success in patent applications.      

Persistence and economic effects of technological innovations: a dynamic and sequential analysis of Uruguayan manufacturing firms

This paper analyzes the long-term relationship between research and development (R&D), innovations and productivity in 400 Uruguayan manufacturing firms during the period 2001–2009 based on a modified version of the structural model of Crepon, Duguet and Mairesse. The paper also analyzes thoroughly the decision of these firms to engage in R&D activities by using a novel categorical dependent variable, which takes three values: non-performance R&D activities, occasional performance or continuous performance over the period. Furthermore, the study investigates whether these manufacturing ?rms innovate persistently or discontinuously over the period. The results suggest a positive link between the intensity of R&D activities and the generation of product and process innovations. They also indicate that innovation probability is temporally persistent at the ?rm-level only for product innovations. Finally, the empirical findings reveal that these technological innovations have a positive effect on firm’s productivity.     

R&D and productivity growth: Evidence from the UK

Although the econometric evaluation of R&D has attracted wide interest in many countries, it has not attracted much in the UK. The main objective of this paper is to fill this void, i.e., to estimate the impact of R&D on productivity growth of the UK manufacturing sector. However, there are some additional objectives. Firstly, we estimate the impact of R&D on productivity growth of large and small firms and we discuss a number of theoretical arguments regarding the role of firm size. Secondly, given that the technological infrastructure influences the innovative capacity of a firm, we compare the impact of R&D on productivity growth of high-tech firms with the corresponding impact on productivity growth of low-tech firms. Thirdly, we investigate whether the contribution of R&D to productivity growth has changed over time.

Based on firm-level data (78 firms, 1989–2002), we find that the contribution of R&D is approximately 0.04. Although the R&D-elasticity of large firms (0.044) is higher than the corresponding elasticity of small firms (0.035), the difference is small. In contrast, the R&D-elasticity is considerably high for high-tech sectors (0.11), but statistically insignificant for low-tech sectors. Finally, the investigation of the elasticity of R&D over time revealed an interesting discontinuity showing that although until 1995 the R&D-elasticity was approximately zero, after 1995 it increased dramatically to 0.09. We investigate the potential causes of such non-linearity and we suggest a number of possible explanations.     

R&D cooperation with scientific institutions: a difference-in-difference approach

Economists and business managers have long been interested in the impact of research and development (R&D) cooperation with scientific institutions on the innovation performance of firms. Recent research identifies a positive correlation between these two variables. This paper aims to contribute to the identification of the relationship between R&D cooperation with scientific institutions and the product and process innovation performance of firms by using a difference-in-difference approach. In doing so, we distinguish between two different types of scientific institutions: universities and governmental research institutes. For the econometric analyses, we use data from the German Community Innovation Survey. In total, data from up to 560 German service and manufacturing firms are available for the difference-in-difference analyses. The results suggest that R&D cooperation with universities and governmental research institutes has a positive effect on both product innovation and process innovation performance of firms.     

Firm size and types of innovation

We propose a general theory of innovation that illustrates the relative benefits of performing process versus product R&D when firm size is endogenous. A firm's size, scope, and R&D portfolio are shown to reflect the same underlying characteristic of the firm, namely manufacturing efficiency. We demonstrate that efficient firms become larger, have greater scope, and perform more of both process and product R&D. In light of decreasing returns to R&D, this implies small firms obtain more product innovations per dollar of R&D than large firms, which is consistent with evidence we present that small firms are more innovative than large firms as they obtain more patent counts and citations per dollar of R&D.     

Effect Of Liquidity On Firms' R&D Spending

The effect of firms financial condition on their R&D investment is explored using a relatively long panel data set for five high-technology industries. We find that financial condition, whether measured as cash flow, the stock of liquid assets or the ratio of liquid assets to current liabilities, does affect the R&D spending of small firms. The effect persists after controlling for unobserved permanent firm effects, and the pattern of significance of lagged effects supports the interpretation of causality running from liquidity to R&D. For larger firms, there is no evidence of such an effect. Using these data, we cannot say whether the absence of an effect in larger firms results from better access to capital markets or from higher adjustment costs in R&D.     

R&D expenditures and firm growth – is small beautiful?

ABSTRACT

This paper examines how efficiently different groups of firms use their R&D expenditures. To this end, it investigates how the empirical relationship between firms' R&D expenditures and their sales growth varies with different values of firm size, firm age, and the number of firms in the respective industry. Using panel data for Switzerland ranging from 1995 to 2012, the paper finds that smaller, more mature firms show a more positive relation between R&D expenditures and sales growth than both relatively larger or younger firms. The paper argues that, on the one hand, these firms can benefit from various small size advantages in the R&D process, such as more motivated researchers, caused by a stronger connection to the firm's fate. On the other hand, these firms can also benefit from a well-established R&D department that allows absorbing the latest technological developments. The paper further finds that industries consisting of many small firms show a more positive relation between R&D expenditures and sales growth than industries consisting of only a few large firms. The intuition behind this result is that industries consisting of many small firms imply more independent innovative trials, which then together result in a higher probability of discovering successful innovations. In sum, the paper finds that groups consisting of a large number of small, more mature firms spend their R&D in the most efficient way.     

Infra-industry spillovers and R&D cooperation: Theory and evidence

We analyse both the theoretical and the empirical side of the issue of R&D spillovers. Each firm's R&D costs are increasing in the amount of information transmitted to other firms, and we account for the possibility that firms control spillovers. We consider both Cournot-Nash and Cournot-Stackelberg behavior. The empirical analysis suggests that (i) firms' control on spillovers is relatively low; (ii) the cost-saving effect associated to joint ventures or R&D cartels is confirmed for industries where firms rely mainly upon own R&D as a source of innovation; (iii) R&D cooperation may increase information sharing, thereby enhancing spillovers.     

Monetary Policy,Financial Frictions,and Heterogeneous R&D Firms in an Endogenous Growth Model*

Motivated by empirical facts, I construct an endogenous growth model in which heterogeneous research and development (R&D) firms are financially constrained and use cash to finance R&D investments. I also examine the optimal monetary policy. The effects of financial constraint crucially depend on whether R&D firms are homogeneous or heterogeneous regarding R&D productivity. If R&D firms are homogeneous, then the zero nominal interest rate (i.e., the Friedman rule) is always optimal under severe financial constraint. Heterogeneity in R&D productivity leads to the opposite result. With heterogeneity, severe financial constraint makes the strictly positive nominal interest rate welfare-improving under a plausible condition.     

R&D investment and internal finance: the cash flow effect

This paper investigates the cash flow effect on R&D investments for firms in Denmark. Evidence is found that internal funds are important in explaining R&D investments, indicating that R&D investment decisions are affected by credit market imperfections. Cash flow sensitivities are larger both for smaller firms and for firms with low debt relative to assets. Furthermore, this effect is also present after controlling for cash flow’s potential role as a predictor of future profitability.