Working Paper: NBER ID: w22035
Authors: 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.
Keywords: R&D investment; financial strength; innovation; productivity
JEL Codes: O3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| financial strength (G32) | R&D investment (O32) |
| R&D investment (O32) | innovation outcomes (O36) |
| financial strength (G32) | innovation outcomes (O36) |
| financial strength (G32) | long-run benefit of R&D investment (O39) |
| financial strength (G32) | productivity improvements from innovation (O49) |