Government Spending, Consumer Demand, and Firm Innovation

44 Pages Posted: 8 Dec 2017 Last revised: 30 Nov 2020

See all articles by Ruchith Dissanayake

Ruchith Dissanayake

Queensland University of Technology - School of Economics and Finance

Yanhui Wu

Queensland University of Technology - School of Economics and Finance; Financial Research Network (FIRN)

Huizhong Zhang

Queensland University of Technology - School of Economics and Finance

Date Written: November 30, 2020

Abstract

We show that the extent to which government spending hinders private sector innovation is highly dependent on a firm’s revenue sensitivity to consumer demand. The effects are stronger for firms that are more dependent on internal financing to fund innovative activity such as firms with high intangible assets and low cash flows. Managers respond to declines in earnings by reducing investments and increasing cash holdings. Firm payouts and external financing remain largely unaffected. We show that the consumer demand channel operates independently of the resource diversification and crowding out mechanisms documented in prior studies.

Keywords: Government spending, innovation, patents, R&D expenditure

JEL Classification: G31, G38, H32

Suggested Citation

Dissanayake, Ruchith and Wu, Yanhui and Zhang, Huizhong, Government Spending, Consumer Demand, and Firm Innovation (November 30, 2020). 9th Conference on Financial Markets and Corporate Governance (FMCG) 2018, Available at SSRN: https://ssrn.com/abstract=3082217 or http://dx.doi.org/10.2139/ssrn.3082217

Ruchith Dissanayake (Contact Author)

Queensland University of Technology - School of Economics and Finance ( email )

GPO Box 2434
2 George Street
Brisbane, Queensland 4001
Australia

HOME PAGE: http://www.rdissanayake.com

Yanhui Wu

Queensland University of Technology - School of Economics and Finance ( email )

GPO Box 2434
2 George Street
Brisbane, Queensland 4001
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Huizhong Zhang

Queensland University of Technology - School of Economics and Finance ( email )

GPO Box 2434
2 George Street
Brisbane, Queensland 4001
Australia

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