Market Power and Duration of R&D Investment in a Panel of Italian Firms

Quaderni - Working Paper DSE N° 1057

33 Pages Posted: 25 Feb 2016

See all articles by Maria Elena Bontempi

Maria Elena Bontempi

University of Bologna - Department of Economics

Luca Lambertini

University of Bologna - Department of Economics

Erica Medeossi

Prometeia

Date Written: February 19, 2016

Abstract

Studies about innovation find evidence of a positive relationship between technological advancement and firm performance, in particular when the innovative effort is continuous. This paper aims to further the analysis on the duration of R&D investment at the firm level. The contribution of this study is threefold: first, we extend Máñez et al. [2014], Triguero et al. [2014] analysis for Spain to the Italian case: we use a panel of manufacturing and service companies, thus enlarging the view of R&D duration within the European countries. Secondly, from a methodological point of view, we employ both discrete- and continuous-time duration models, in order to test the Proportional Hazards (PH) assumption, i.e. the assumption that the hazard rate is equivalent over time across groups. Last, but not least, we assess whether a firm’s likelihood of continuing investment in R&D depends on the market power of companies. We test alternative measures for market power: the classical price-cost margin and a new proxy for the firm demand elasticity, obtained from a specific survey question. Results are in line with the hypothesis that R&D presents considerable temporal spill overs and strong persistence, even once unobserved heterogeneity is controlled for. Also, we argue that the appropriate proxy for market power is the firm demand elasticity, and we find support for the Schumpeterian hypothesis.

Keywords: investment in R&D, investment in physical capital, market power, duration, panel data

JEL Classification: C23, C41, D22, G32, L10, O30

Suggested Citation

Bontempi, Maria Elena and Lambertini, Luca and Medeossi, Erica, Market Power and Duration of R&D Investment in a Panel of Italian Firms (February 19, 2016). Quaderni - Working Paper DSE N° 1057, Available at SSRN: https://ssrn.com/abstract=2737380 or http://dx.doi.org/10.2139/ssrn.2737380

Maria Elena Bontempi (Contact Author)

University of Bologna - Department of Economics ( email )

Strada Maggiore, 45
40125 Bologna, 40125
Italy
+39 051 2092600 (Phone)
+39 051 2092664 (Fax)

Luca Lambertini

University of Bologna - Department of Economics ( email )

Strada Maggiore 45
Bologna, 40125
Italy
+39 051 2092600 (Phone)
+39 051 2092664 (Fax)

Erica Medeossi

Prometeia ( email )

Italy

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