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An Empirical Examination of the Procyclicality of R&D Investment and Innovation

Author

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  • Kira R. Fabrizio

    (Boston University School of Management)

  • Ulya Tsolmon

    (Duke University)

Abstract

The Schumpeterian opportunity cost hypothesis predicts that firms concentrate innovative activities in recessions. However, empirical evidence suggests that innovative activities are procyclical. Theory proposes that firms shift R&D investments and innovation from recessions to booms to maximize returns by capturing high-demand periods before imitators compete away rents. This paper provides the first empirical test of these predictions. Results indicate that R&D spending is more procyclical in industries with faster obsolescence, where matching invention to demand is more valuable, and innovation is more procyclical in industries with weaker IP protection, where imitation poses a greater threat. © 2014 The President and Fellows of Harvard College and the Massachusetts Institute of Technology

Suggested Citation

  • Kira R. Fabrizio & Ulya Tsolmon, 2014. "An Empirical Examination of the Procyclicality of R&D Investment and Innovation," The Review of Economics and Statistics, MIT Press, vol. 96(4), pages 662-675, October.
    • Handle: RePEc:tpr:restat:v:96:y:2014:i:4:p:662-675
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    More about this item

    Keywords

    cost hypothesis; recession; investments; innovation; procyclical; imitations;
    All these keywords.

    JEL classification:

    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • O23 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Fiscal and Monetary Policy in Development

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