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

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  • Bond, Stephen
  • Harhoff, Dietmar
  • Van Reenen, John

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.

Suggested Citation

  • Bond, Stephen & Harhoff, Dietmar & Van Reenen, John, 2003. "Investment, R&D and financial constraints in Britain and Germany," LSE Research Online Documents on Economics 771, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:771
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    File URL: https://eprints.lse.ac.uk/771/
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    More about this item

    Keywords

    Investment; R&D; cash flow; financial constraints; panel data.;
    All these keywords.

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • C25 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions; Probabilities
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives

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