Revisiting the R&D Cyclicality with Dynamic R&D mode

Abstract

This study revisits the topic of R&D cyclicality by applying the dynamic R&D investment model to firm-level panel data, which is acquired from KIS-Value. Methodologically this study bridges previous empirical studies of R&D investment under financial constraints with studies of R&D cyclicality. Specifically, the former often apply dynamic panel methodology like GMM (generalized method of moments) to dynamic R&D model to investigate effects of financial constraints but have not put much emphasis on R&D response to business cycles. On the other hand, the latter have focused on direction of R&D cyclicality controlling financial condition, in order to examine the Schumpeterian prediction of countercyclical R&D investment; however, empirical methods of R&D cyclicality studies are surprisingly detached from the former. Using the widely used system GMM for the empirical analysis of R&D investment with financial constraints, this study finds procyclical response of R&D investment to sales growth with mitigating effects of credit constraints, which is measured by credit ratings. Furthermore, asymmetrically procyclical R&D is found, as the procyclicality and the effect of financial constraint are concentrated to contraction period, particularly the post-financial crisis era after 2010. In sum, this empirical analysis confirms the procyclicality of R&D investment in contrast to the Schumpeterian prediction of countercyclical R&D investment, even after controlling financial constraints.