Dynamic R&D Choice and the Impact of the Firmís Financial Strength

Abstract

This article estimates a dynamic model of firm R&D choice using data on German firms in high-tech manufacturing industries. It incorporates a measure of the firmís financial strength, derived from its credit rating, which is shown to lead to substantial di§erences in estimates of the costs and expected long-run benefits from R&D investment. Firms with high credit ratings have a higher probability of generating innovations from their R&D investment, and the innovations have a larger impact on productivity and profits. Averaging across all firms, the long run benefit of investing in R&D is 6.0 percent of firm value. It ranges from 10.8 percent for firms in a strong Önancial position to 2.0 percent for firms in a weaker financial position