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Research and development as an initiator of fixed capital investment

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Abstract

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.

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  1. ETH Zurich, KOF Swiss Economic Institute, Leonhardstrasse 21, 8092, Zurich, Switzerland

    Andrin Spescha & Martin Woerter

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  1. Andrin Spescha
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Correspondence to Martin Woerter.

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ETH Zurich, KOF Swiss Economic Institute, spescha@kof.ethz.ch, woerter@kof.ethz.ch, Leonhardstrasse 21, 8092 Zurich, Switzerland, + 41 44 632 51 51

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Spescha, A., Woerter, M. Research and development as an initiator of fixed capital investment. J Evol Econ 31, 117–145 (2021). https://doi.org/10.1007/s00191-020-00681-9

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