Investment–uncertainty relationship: differences between intangible and physical capital

Abstract

This paper disentangles the effects of uncertainty in explaining the heterogeneity of firms' investments. In particular, following Bloom (2007), we test the role of uncertainty and liquidity constraints extending the model to include R&D, non-R&D intangibles, as well as physical capital.The analysis is performed on a large dataset of Italian firms, covering both manufacturing and services sectors, as well as large and small firms. We show that non convex adjustment costs affect different capital inputs in different ways, depending on their degree of firm-specificity. The results confirm the Bloom model: flow adjustment costs explain investment in R&D and, to a lesser extent, in non-R&D intangibles. However, it struggles to explain tangible investment plans because of the ambiguous effect of the stock adjustment costs.

Do financial constraints moderate the relationship between innovation subsidies and firms' R&D investment?

“…The high degree of uncertainty and the long period of maturity associated with R&D investment means that firms must have a sustained commitment over time in order for projects to be successfully completed (Bontempi, 2016). Due to these exceptional conditions, an analysis of firm innovation requires the application of an analytic methodology that takes into account the time perspective.…”

“…However, as Aschhoff and Sofka (2009) point out firms’ R&D investment is a fundamental part of the innovation process. R&D investment can be oriented towards the acquisition of new assets capable of improving the productivity of a process (Bontempi, 2016). Thus, in a broad sense, innovations are the result of R&D investment projects that generate a set of positive knowledge spillovers for the firm (Ugur et al , 2020).…”

The Dynamic Effect of Uncertainty on Corporate Investment through Internal and External Financing

“…Moreover, R&D investmentcash flow sensitivity is more pronounced in younger and smaller firms and Hall et al (2016)). In the context of the dynamic relation between uncertainty and corporate investment, uncertainty induces a different impact on the dynamics of capital investment and R&D because of the different structure of adjustment costs (Bloom (2007) and Bontempi (2015)). In this study, focusing on Japanese manufacturing firms making both types of investments, we uncover the different features of the dynamics in their sensitivity to financing constraints under high uncertainty.…”

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

“…Such characteristics entail lower protection of external investors (with respect to "outsider-dominated" systems as the UK and the US), strong and stable firm-bank liaisons, and lower occurrence of changes in corporate control. Even if rarely significant, overall the negative sign of cash flow (CF) and the positive one for debt (D) tend to signal the presence of liquidity constraints due to agency costs and asymmetric information particularly relevant if the R&D case (see also Bontempi [2016]). …”