Research and development as an initiator of fixed capital investment

• Published in: Journal of evolutionary economics Vol. 31; no. 1; pp. 117 - 145
• Main Authors: Spescha, Andrin, Woerter, Martin
• Format: Journal Article
• Language: English
• Published: Berlin/Heidelberg Springer Berlin Heidelberg 2021; Springer Nature B.V
• Subjects: Capital goods; Capital investments; Causality; Economic Growth; Economic Theory/Quantitative Economics/Mathematical Methods; Economics; Economics and Finance; Entrepreneurship; Expenditures; Institutional/Evolutionary Economics; Inventions; Microeconomics; Panel data; R & D/Technology Policy; R&D; Regular Article; Research & development; Research & development expenditures; Sales; Stagnation; 033; Fixed capital investment; R&D expenditures; Business cycle; E32; Technological opportunities
• ISSN: 0936-9937; 1432-1386
• DOI: 10.1007/s00191-020-00681-9

This paper investigates the causal relationship between firms’ R&D expenditures and their investments in fixed capital. It argues that a firm’s R&D expenditures lead to inventions that in turn trigger investments in fixed capital, as the manufacturing of newly invented goods or services requires the creation of additional production capacities. Using firm-level panel data ranging from 1990 to 2014, the paper applies a 2SLS approach to uncover the direction of causality between R&D expenditures and fixed capital investment. To obtain exogenous instruments, the paper exploits shocks to i) technological opportunities and ii) innovative sales of capital goods industries. The results reveal that firms’ R&D expenditures cause subsequent investments in fixed capital, while there is no evidence of the reverse effect. An increase in R&D expenditures of 1% leads to an increase in fixed capital investments between 0.4% and 0.6%. Therefore, increasing R&D expenditures may not only be valuable for long-term economic growth but also, via fixed capital investment, provide the economy with positive stimuli in times of prolonged stagnation.