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The Role Of Sunk Costs In The Decision To Invest In R&D

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  • JUAN A. MÁÑEZ
  • MARÍA E. ROCHINA‐BARRACHINA
  • AMPARO SANCHIS
  • JUAN A. SANCHIS

Abstract

We present a dynamic empirical model of a firm's R&D decisions that is consistent with the existence of sunk R&D costs, taking into account that these costs may differ between small and large firms, and among different technological regimes. We estimate a multivariate dynamic discrete choice model using firm‐level data of Spanish manufacturing for 1990–2000. Conditional on firm heterogeneity and serially correlated unobservable factors, we find that R&D history matters. This true state dependence allows inferring the existence of sunk R&D costs associated with performing R&D. Sunk R&D costs are found to be higher for large, high‐tech firms.

Suggested Citation

  • Juan A. Máñez & María E. Rochina‐Barrachina & Amparo Sanchis & Juan A. Sanchis, 2009. "The Role Of Sunk Costs In The Decision To Invest In R&D," Journal of Industrial Economics, Wiley Blackwell, vol. 57(4), pages 712-735, December.
    • Handle: RePEc:bla:jindec:v:57:y:2009:i:4:p:712-735
    DOI: 10.1111/j.1467-6451.2009.00398.x
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