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Dynamic R&D choice and the impact of the firm's financial strength

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  • Peters, Bettina
  • Roberts, Mark J.
  • Vuong, Van Anh

Abstract

This article investigates how a firm's financial strength affcts 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.

Suggested Citation

  • Peters, Bettina & Roberts, Mark J. & Vuong, Van Anh, 2015. "Dynamic R&D choice and the impact of the firm's financial strength," ZEW Discussion Papers 15-083, ZEW - Leibniz Centre for European Economic Research.
    • Handle: RePEc:zbw:zewdip:15083
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    Cited by:

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    2. Falavigna, Greta & Ippoliti, Roberto, 2023. "SMEs’ behavior under financial constraints: An empirical investigation on the legal environment and the substitution effect with tax arrears," The North American Journal of Economics and Finance, Elsevier, vol. 66(C).
    3. Audretsch, David & Hafenstein, Marian & Kritikos, Alexander S. & Schiersch, Alexander, 2018. "Firm Size and Innovation in the Service Sector," IZA Discussion Papers 12035, Institute of Labor Economics (IZA).
    4. Greta Falavigna & Roberto Ippoliti, 2022. "Financial constraints, investments, and environmental strategies: An empirical analysis of judicial barriers," Business Strategy and the Environment, Wiley Blackwell, vol. 31(5), pages 2002-2018, July.
    5. Chen, Zhiyuan & Zhang, Jie & Zi, Yuan, 2021. "A cost-benefit analysis of R&D and patents: Firm-level evidence from China," European Economic Review, Elsevier, vol. 133(C).
    6. Giebel, Marek & Kraft, Kornelius, 2021. "Subsidies and innovation in the recent financial crisis," ZEW Discussion Papers 21-097, ZEW - Leibniz Centre for European Economic Research.
    7. Dorothea Schäfer & Andreas Stephan & Jenniffer Solórzano Mosquera, 2017. "Family ownership: does it matter for funding and success of corporate innovations?," Small Business Economics, Springer, vol. 48(4), pages 931-951, April.
    8. Giebel, Marek & Kraft, Kornelius, 2020. "Bank credit supply and firm innovation behavior in the financial crisis," Journal of Banking & Finance, Elsevier, vol. 121(C).
    9. Pellens, Maikel & Licht, Georg, 2017. "Business angels: Crucial elements of the European financial ecosystem," ZEW policy briefs 5/2017, ZEW - Leibniz Centre for European Economic Research.
    10. Kaya, Orcun, 2022. "Determinants and consequences of SME insolvency risk during the pandemic," Economic Modelling, Elsevier, vol. 115(C).
    11. Francesco Manaresi & Nicola Pierri, 2018. "Credit supply and productivity growth," Temi di discussione (Economic working papers) 1168, Bank of Italy, Economic Research and International Relations Area.
    12. Fangyuan Qian & Shuiye Niu & Yujuan Xi, 2022. "Multi-Technology Driven R&D Cost Improvement Scheme and Application Utility of EESP in Energy-Intensive Manufacturing Industry," Sustainability, MDPI, vol. 14(10), pages 1-21, May.
    13. Francesco Manaresi & Nicola Pierri, 2018. "Credit supply and productivity growth," BIS Working Papers 711, Bank for International Settlements.
    14. Giebel, Marek & Kraft, Kornelius, 2020. "R&D investment under financing constraints," ZEW Discussion Papers 20-018, ZEW - Leibniz Centre for European Economic Research.
    15. Francesco Manaresi & Mr. Nicola Pierri, 2019. "Credit Supply and Productivity Growth," IMF Working Papers 2019/107, International Monetary Fund.

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    More about this item

    Keywords

    R&D choice; Financial strength; Innovation; Productivity; Dynamic structural model;
    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
    • O32 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Management of Technological Innovation and R&D
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General

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