Research and Development As An Investment

Abstract

About 20 percent of the gross investment expenditures of U.S. manufacturing firms is expenditures on research and development. Like investment in physical capital, R&D also responds to news about future prospects of the firm, such as profitability, technological opportunities, or changes in factor prices. Using data from a panel of large U.S. manufacturing firms that was developed within the Productivity Program of the NBER, we investigate the differential responses of these two types of investment to changes in the value of the firm's assets as perceived by financial markets and the interaction of these responses.In order to study this topic empirically, we develop a stochastic dynamic programming model of a firm with two types of capital (physical and knowledge capital) which are used to produce profits. A feature of the model is the distinction between the accumulation of the two kinds of capital: expenditures on the physical capital stock are incurred one or more years before the capital actually becomes productive, whereas R&D capital is produced jointly as a function of current expenditure and the past technological position of the firm. Two individual firmspecific shocks are considered: one to the overall profitability of the firm, and one to the "productivity" of R&D. In the empirical estimates, we find that these two shocks account for about 20 percent of the total variance in net investment, 15 percent of the variance in the firm-leve1 R&D to capital ratio, but only about 5 percent of the annual rates of return. The profitability shock is well described by a moving average process of order three, while the technology shock process is more nearly permanent: first order autoregressive with parameter near unity.

Effect of Cash flow on the R&D investment of Pharmaceutical Companies - focused on KOSDAQ market

“…This finding is consistent with the prediction that, if a company faces a financial risk, it will be passive in R&D investment due to its financial difficulties. This conclusion is similar to the findings of the research by Baysinger and Hoskisson [9], Kochhar and David [10], Hoskisson and Hitt [12] R&D investment is an intangible asset that contributes to the future growth of a company, and strategic decision making is extremely important as R&D has a high risk of failure, unlike general facilities investment [20]. It is necessary to examine the ability of a company to afford external financing, generally determined by the available financial resources within the company [10].…”

R&D Investment Responses to R&D Subsidies: A Theoretical Analysis and a Microeconometric Study

“…The following accumulation equation for knowledge has been suggested by Hall and Hayashi (1989), Jones (1995), Lach and Rob (1996) and Klette (1996) among others:…”

Are There Financing Constraints for R&D and Investment in German Manufacturing Firms?

“…For example, Hall and Hayashi (1989) and Klette (1996) have suggested to specify the law of motion as K r = Kl=FRf, a,p E (0, I) where a is the rate of depreciation of the log capital stock. This functional form assumption has been proposed to capture the non-exclusive character of the existing knowledge stock which presumably does not only enter in production of output but also in the production of new knowledge.…”