Research and/or Development? Financial Frictions and Innovation Investment
In a new Working Paper, TPRI affiliates Filippo Mezzanotti and Timothy Simcoe study how firms shifted the composition of their R&D investments during the 2008 financial crisis. They find that when US public companies were particularly exposed to the financial markets due to short-term refinancing needs, those companies reduced R&D investment primarily by cutting their basic and applied research. The impact of these cuts can be seen in patents and patent citations within 3 to 5 years after the crisis.
Basic and applied research investments aim to produce new knowledge, whereas Development investments seek to apply existing knowledge to new products or processes. Although aggregate statistics show that Research has been declining as a share of total US business R&D spending for several decades, this is one of the first studies to distinguish between “R” and “D” at the firm level, and to show how financial constraints will not only reduce overall R&D spending, but also alter the mix between research and development. For more details on the study, see the NBER working paper.