Dynamic R&D Choice and the Impact of the Firm's Financial Strength

29 Pages Posted: 4 Jan 2016

See all articles by Bettina Peters

Bettina Peters

Center for European Economic Research (ZEW)

Mark J. Roberts

Pennsylvania State University - College of the Liberal Arts - Department of Economics; National Bureau of Economic Research (NBER)

Van Anh Vuong

University of Cologne

Multiple version iconThere are 2 versions of this paper

Date Written: December 2015

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 choice, Financial strength, Innovation, Productivity, Dynamic structural model

JEL Classification: O31, O32, G30

Suggested Citation

Peters, Bettina and Roberts, Mark J. and Vuong, Van Anh, Dynamic R&D Choice and the Impact of the Firm's Financial Strength (December 2015). ZEW - Centre for European Economic Research Discussion Paper No. 15-083. Available at SSRN: https://ssrn.com/abstract=2710662 or http://dx.doi.org/10.2139/ssrn.2710662

Bettina Peters (Contact Author)

Center for European Economic Research (ZEW) ( email )

P.O. Box 10 34 43
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Germany
+496211235174 (Phone)
+496211235170 (Fax)

HOME PAGE: http://www.zew.de

Mark J. Roberts

Pennsylvania State University - College of the Liberal Arts - Department of Economics ( email )

513 Kern Graduate Building
University Park, PA 16802-3306
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Van Anh Vuong

University of Cologne ( email )

Albertus-Magnus-Platz
Cologne, 50923
Germany

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