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Investment, R&D and financial constraints in Britain and Germany

Bond, Stephen, Harhoff, Dietmar and Van Reenen, John (2003) Investment, R&D and financial constraints in Britain and Germany. 595. Centre for Economic Performance, London School of Economics and Political Science, London, UK.

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Abstract

This paper tests for the importance of cash flow on investment in fixed capital and R&D using firm-level panel data in two countries between 1985 and 1994. For German firms, cash flow is not informative in simple econometric models of fixed investment or R&D. In identical specifications for British firms, cash flow is informative about investment, although not about the level of R&D spending conditional on the R&D participation decision. In the UK, we also find that investment is less sensitive to cash flow for R&Dperforming firms, and that cash flow predicts whether firms perform R&D or not. We confirm that these differences do not simply reflect a greater role for current cash flow in forecasting future sales. These results suggest that financial constraints are more significant in Britain, that they affect the decision to engage in R&D rather than the level of R&D spending by participants, and that consequently the British firms that do engage in R&D are a self-selected group where financing constraints tend to be less binding.

Item Type: Monograph (Discussion Paper)
Official URL: http://cep.lse.ac.uk
Additional Information: © 2003 S. Bond, D. Harhoff and J. Van Reenen
Library of Congress subject classification: H Social Sciences > HB Economic Theory
Journal of Economic Literature Classification System: L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L13 - Oligopoly and Other Imperfect Markets
C - Mathematical and Quantitative Methods > C2 - Econometric Methods: Single Equation Models; Single Variables > C25 - Discrete Regression and Qualitative Choice Models
O - Economic Development, Technological Change, and Growth > O3 - Technological Change; Research and Development > O31 - Innovation and Invention: Processes and Incentives
Sets: Collections > Economists Online
Research centres and groups > Centre for Economic Performance (CEP)
Departments > Economics
Rights: http://www.lse.ac.uk/library/usingTheLibrary/academicSupport/OA/depositYourResearch.aspx
Identification Number: 595
Date Deposited: 15 Feb 2008
URL: http://eprints.lse.ac.uk/771/

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