Financing constraints and R&D investments of large corporations in Europe and the US

Abstract

This paper explores the existence and importance of financing constraints for R&D investments in large EU and US manufacturing companies over the period [2000][2001][2002][2003][2004][2005][2006][2007]. The main results obtained by estimating error-correction equations suggest that the sensitivity of R&D investments to cash flow variations are important for European firms while US firms do not appear to be financially constrained. In terms of policy implications, these results suggest improving the conditions for access to external capital to finance R&D activities in the EU.HE EXISTENCE OF CAPITAL MARKET imperfections such as asymmetric information between lenders and borrowers affects the capital investment decisions of a firm and introduces possible financing constraints, i.e. credit rationing by lenders. Such constraints may actually be even more pronounced in the case of intangible investments such as R&D since these activities are more risky by nature and typically provide less collateral to lenders than do capital goods. Based on a representative sample of worldwide firms active in R&D activities over the recent period, this study aims to assess the existence and importance of financing constraints on the R&D investments of firms. In particular, the differences in the extent to which these constraints differ across firms between the EU and the US are examined.The empirical analysis is based on a consolidated sample of large R&D active companies in the manufacturing and services sectors. The sources of this information are the successive editions of the EU Industrial R&D Investment Scoreboards (2004)(2005)(2006)(2007)(2008) conducted by the Joint Research Centre-Institute for Prospective Technical Studies (JRC-IPTS) of the European Commission (European Commission, 2009). This source is matched with the Compustat database (2009) gathering financial information, including the cash flow of the firms. The final sample used in the empirical analysis consists of an unbalanced panel of 1,962 firms over 2000-2007which is representative of about 80% of all R&D carried out in the private sector worldwide. All variables are presented using constant exchange rates and prices and R&D stocks are constructed for each firm on the basis of the perpetual inventory method (Griliches, 1979).The model used to identify the potential liquidity of the constraints of the firms is an error-correction model (ECM) for R&D investment. This model is derived from the optimal level of R&D investment when considering a constant elasticity of substitution (CES) production function of a profit-maximising firm. Financing constraints are measured by the sensitivity of R&D investment decisions to cash flow, assuming that investments of firms that face liquidity constraints are more likely to be sensitive to the availability of internal finance.This model is estimated using econometric methods for panel data. Traditional fixed-effect estimators T Michele Cincera (corresponding author) and Julien Ravet are at the Solvay Brussels

Research and development, cash flow, agency and governance: UK large companies

“…Previous results supportive of a link include Hall (1992;1999); Himmelberg and Peterson (1994) and Mulkay et al (2001). Cincera and Ravet (2010) suggest that financing constraints on R&D have appeared in Europe, but not the US since 2000, whereas earlier work by Hall (2002) suggested a higher cash flow coefficient for the US and UK than elsewhere. A related finding in Bond et al (2003) suggests that cash flow is important for the decision to do R&D but not its intensity.…”

The production function of top R&D investors: Accounting for size and sector heterogeneity with quantile estimations

“…Due to these features, the sample has been previously used for investigating a number of interesting issues pertaining to the same population (e.g. Cincera and Ravet, 2010;García-Manjóna and Romero-Merino, 2012).…”

Financing constraints, R&D investments and innovative performances: new empirical evidence at the firm level for Europe

“…On the one hand, whether 'financing constraints matter for R&D' (Brown, Martinsson, and Petersen 2012) has been found to be dependent on firms' structural characteristics (size and age, in particular) and R&D financing strategies (internal vs. external), as well as quite variable across different temporal and geographical empirical settings (Himmelberg and Petersen 1994;Harhoff 1998;Mulkay, Hall, and Mairesse 2000;Bond, Harhoff, and Van Reenen 2005;Cincera and Ravet 2010;Brown, Martinsson, and Petersen 2012). On the other hand, the 'more money, more innovation' story (Hottenrott and Peters 2012) has also been questioned, by pointing to a possible beneficial impact of financing constraints on the selection of more efficient innovative projects (Musso and Schiavo 2008;Almeida, Hsu, and Li 2013) -that is, 'less money, better innovation' -and to a possible reverse impact of innovation on financing constraints, due to the riskness and information problems the former entails (Hajivassiliou and Savignac 2007;Hottenrott and Peters 2012;Lahr and Mina 2013) -that is, 'more innovation, less money'.…”