The Determinants of Industrial R&D: A Funds Flow Simultaneous Equation Approach
7 Pages Posted: 11 Mar 2015
Date Written: March 9, 2015
Abstract
In this paper a general flow of funds model explaining aggregate R&D investment behaviour along the lines established initially by Dhrymes and Kurtz (1967) is developed and estimated using company level data. The approach generalizes a number of previous models by allowing for simultaneous interaction between alternative uses of the firm's investment funds and between the sources and uses of investment funds. Three key conclusions from the estimation of the system emerge: (a) although previous models have often recognized the importance of internal funds and the unimportance of external financing for R&D, this is the first model to appear that quantifies both phenomena; (b) although some previous studies using U.S. data have concluded that R&D expenditures may lower the marginal returns on capital outlays, our results show no such effects; (c) consistent with recent studies, no evidence of crowding out of private expenditures by government expenditures could be found.
Keywords: R&D determinants; funds flows; simultaneous equations
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