R&D smoothing: evidence and some theory

Serodio, Pedro ORCID: https://orcid.org/0000-0001-8835-1611 (2020) R&D smoothing: evidence and some theory. Working Paper. N/A. . (Published online first)

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Abstract

We revisit the debate over the cyclical pattern of R&D and its implications for Schumpeter’s opportunity cost hypothesis using a production asset pricing model to explain firms’ research spending decisions and comparing simulation results with empir- ical estimates. These results overwhelmingly suggest that there is a significant degree of smoothing in research spending, both in theory and in practice, which implies both pro-cyclical behaviour in its growth rate as well as counter-cyclical behaviour in the share of R&D on output. Evidence in favour of modified version of the opportunity cost hypothesis is also uncovered, with firms investing counter-cyclically in research as measured by its ratio with respect to the sum of R&D and capital expenditures. Al- ternative theories for the observed pro-cyclical behaviour of research spending are also addressed, with those based on internal and/or external financial constraints receiving very little empirical supports.

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