Financial Constraints and the Cyclicality of R&D Investment: Evidence from Slovenia

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in AbstractThis paper uses firm level data to show how R&D investment responds to shocks in sales growth in credit constrained firms. A credit constrained firm has to rely on its cash flow and borrowing capacity to survive its short-run liquidity shock when hit by a negative shock. This reduces the possibility for further borrowing in order to invest in non-tangible long term R&D, hence a negative shock should hit R&D investments more in firms that are more credit constrained.We find that in financially constrained firms sales growth is positively associated with R&D investment, suggesting procyclical behavior of R&D investment in credit constrained firms. In contrast, we find that in firms with no financial constraints R&D investment is negatively correlated with sales growth, suggesting countercyclical behavior of R&D, consistent with the Schumpeterian idea of restructuring.Furthermore, we find that the firm level response in R&D investment to sales growth is stronger in firms that are more financially dependent, such as firms that are no part of a multinational, firms not receiving subsidies or firms with less collateral.

Macroeconomic Instability and the Incentive to Innovate

“…of IntRateCoV leads to a decrease of 0.012% points in BusinessR&D, which is a sizably lower impact when compared to that of real volatility and is roughly the same figure as that appearing in Table 2. These results are in line with the findings of the microeconometric literature reported above (Rafferty, 2003a;Aghion et al, 2008;Rafferty and Funk, 2008;Bohva-Padilla et al, 2009), which reports a negative impact of both real and monetary volatility on the R&D spending financed by the firms considered in their panels. Finally, PolInstab, also appears with a very similar coefficient to the one estimated using simple FE.…”

“…As a result, firms will tend to relocate resources away from R&D and towards the productive compartment when positive demand shocks occur, but the opposite is unlikely to happen (to the same extent), during negative demand shocks. Relying on the same methodology used by Aghion et al (2008), Bohva-Padilla et al (2009) additionally prove that both procyclicality and counter-cyclicality of R&D are confirmed. The first, however, is more likely to hold for small and medium-sized firms, which tend to experience binding credit constraints the most; whereas, the second characterises non-credit constrained firms, such as MNCs or subsidised firms.…”

“…One of these is the real interest rate, IntRate 10 . The use of the latter as a determinant of investment is rather common (Rafferty, 2003b;Aghion et al, 2008;Rafferty and Funk, 2008;Bohva-Padilla et al, 2009;Becker and Pain, 2003;Escaleras&Thomakos, 2008). The interest rate considered is the lending interest rate charged to businesses by commercial banks, with a maturity of 3 months to 1 year.…”

“…1 Some of these, in particular, have focused on the effects of macro-volatility on private investment activity, with sometime conflicting results (Hartman, 1972;Abel, 1983;Dehn, 2000;Pindyck and Solimano, 1993;Bernanke, 1980;Federer, 1993;Serven, 2003, Aghion et al, 2010. A few recent others have looked, in particular, at the link between macro-instability and innovative private investment, in the form of R&D expenditure (Aghion and Saint-Paul, 1998;Goel and Ram, 1999;Saint-Paul, 2003;Rafferty, 2003a;Barlevy, 2005;Aghion et al, 2008;Rafferty and Funk, 2008;Bohva-Padilla et al, 2009). Conflicting results arise in this sub-set of the literature too.…”

“…But if business cycles decrease inventive activity, then attempts to smooth out the business cycles can improve productivity growth and long-run growth. Those that argue in favor of a pro-cyclical response pattern maintain that a 'cash-flow' effect exists, which financially constrains firms' activities and hinders the undertaking of innovative investment during downturns (Rafferty, 2003a;Rafferty and Funk, 2008;Aghion et al, 2008;Bohva-Padilla et al, 2009, Aghion et al, 2010. Barlevy (2005) adds to this that, although credit constraints certainly account for part of the pro-cyclicality, knowledge spillover effects play their part too.…”