Is Equity Finance, Macroeconomic Growth and Capital Intensity Relevant to Firm-Level R&D Expenditures?

Jason Hecht


This paper examines the association between firm-level research and development (R&D) expenditures and net equity issuance, sales, gross cash flow, the capital to labor ratio, and the growth rate of inflation-adjusted (real) Gross Domestic Product (GDP) in a firm's home country. Dynamic panel models using General Methods of Moments techniques are estimated from an unbalanced sample of firms across the major industrialized economies as well as China and India from 1998 to 2008. Results from the full cross-country panel sample found a significant and positive association between R&D expenditures and sales, net equity issuance and lagged real GDP; a negative association was found with the capital to labor ratio. Macroeconomic growth had a positive impact on R&D expenses in each country but was statistically significant only for firms located in Germany, Great Britain, and the US. Equity capital is found to be a significant source of R&D funding for US firms. However, estimates for non-US firms indicate that capital intensity nor net equity issuance was a consistently significant predictor of R&D expenditures. The latter result may be due to cross-country differences in financial and institutional relationships between capital market and bank-based systems of corporate finance. Finally, this study underscores the importance of including macroeconomic growth in microeconometric panel models of R&D investment.

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International Journal of Economics and Finance  ISSN  1916-971X (Print) ISSN  1916-9728 (Online)

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