The Interaction Between Capital Investment and R&amp;D in Science-Based Firms

Lach, Saul; Schankerman, Mark

doi:10.3386/w2377

Cited by 2 publications

(3 citation statements)

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“…We also implies a timing convention where news arrives during the previous period (t-1) and investment plans are made at the beginning of year t. This convention was also followed in Fakes (1985), Criliches, Hall, and Fakes (1987), and Lach and Schankerman (1988) for the following reason: the data indicate that the strongest correlations between investment variables and q are Although our model is in terms of real variables, we use (the logs of) nominal variables for estimation and include a set of free time dwmuies and a set of twenty industry dummies at the roughly two-digit level in each equation; the only remaining deflation that has not been performed is that which is firm-year specific. Thus the variance and covariance relationships which we will be fitting are based on the row of Table 2 labelled "Var.…”

Section: Data and Preliminary Resultsmentioning

confidence: 99%

“…This is the fact alluded to above, that the growth rates of investment have a sample variance much larger than that of R&D expenditures (Mairesse andSiu 1984, Lach andSchankerman 1988).…”

Section: Modelmentioning

confidence: 91%

“…Recent work by Lach and Schankerman (1988) investigated some of the interactions between the two kinds of investment (i,r) and the oneperiod rate of return (q) to the firm using dynamic factor methods and a dataset that overlaps considerably with ours. Their model is explicitly non-structural, but informative as to timing, and provides an interesting descriptive summary of the stylized facts.…”

Section: Introductionmentioning

confidence: 99%

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Research and Development As An Investment

Hall¹,

Hayashi²

1989

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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.

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Section: Data and Preliminary Resultsmentioning

confidence: 99%

“…This is the fact alluded to above, that the growth rates of investment have a sample variance much larger than that of R&D expenditures (Mairesse andSiu 1984, Lach andSchankerman 1988).…”

Section: Modelmentioning

confidence: 91%

Section: Introductionmentioning

confidence: 99%

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