CREDIT CONSTRAINTS AND THE CYCLICALITY OF R&D INVESTMENT: EVIDENCE FROM FRANCE

Abstract

We use a French firm-level panel data set over the period 1993-2004 to analyze the relationship between credit constraints and firms' R&D behavior over the business cycle. Our main results can be summarized as follows: (i) the share of R&D investment over total investment is countercyclical without credit constraints, but it becomes more procyclical as firms face tighter credit constraints; (ii) the result is magnified for firms in sectors that depend more heavily upon external finance; (iii) in more credit constrained firms, R&D investment share plummets during recessions but does not increase proportionally during upturns; (iv) average R&D investment and productivity growth are more negatively correlated with sales volatility in more credit constrained firms.JEL classification: E22, E32, O16, O30, O32.

Macroeconomic Instability and the Incentive to Innovate

“…As a result, firms will tend to relocate resources away from R&D and towards the productive compartment when positive demand shocks occur, but the opposite is unlikely to happen (to the same extent), during negative demand shocks. Relying on the same methodology used by Aghion et al (2008), Bohva-Padilla et al (2009) additionally prove that both procyclicality and counter-cyclicality of R&D are confirmed. The first, however, is more likely to hold for small and medium-sized firms, which tend to experience binding credit constraints the most; whereas, the second characterises non-credit constrained firms, such as MNCs or subsidised firms.…”

“…One of these is the real interest rate, IntRate 10 . The use of the latter as a determinant of investment is rather common (Rafferty, 2003b;Aghion et al, 2008;Rafferty and Funk, 2008;Bohva-Padilla et al, 2009;Becker and Pain, 2003;Escaleras&Thomakos, 2008). The interest rate considered is the lending interest rate charged to businesses by commercial banks, with a maturity of 3 months to 1 year.…”

“…1 Some of these, in particular, have focused on the effects of macro-volatility on private investment activity, with sometime conflicting results (Hartman, 1972;Abel, 1983;Dehn, 2000;Pindyck and Solimano, 1993;Bernanke, 1980;Federer, 1993;Serven, 2003, Aghion et al, 2010. A few recent others have looked, in particular, at the link between macro-instability and innovative private investment, in the form of R&D expenditure (Aghion and Saint-Paul, 1998;Goel and Ram, 1999;Saint-Paul, 2003;Rafferty, 2003a;Barlevy, 2005;Aghion et al, 2008;Rafferty and Funk, 2008;Bohva-Padilla et al, 2009). Conflicting results arise in this sub-set of the literature too.…”

“…But if business cycles decrease inventive activity, then attempts to smooth out the business cycles can improve productivity growth and long-run growth. Those that argue in favor of a pro-cyclical response pattern maintain that a 'cash-flow' effect exists, which financially constrains firms' activities and hinders the undertaking of innovative investment during downturns (Rafferty, 2003a;Rafferty and Funk, 2008;Aghion et al, 2008;Bohva-Padilla et al, 2009, Aghion et al, 2010. Barlevy (2005) adds to this that, although credit constraints certainly account for part of the pro-cyclicality, knowledge spillover effects play their part too.…”

“…In fact, when the costs are higher and may disrupt current production, pro-cyclicality holds instead. Furthermore, Aghion et al (2008) and Rafferty and Funk (2008) show that the existence of an asymmetry in binding constraints causes cash-flow constraints to bind more during recessions than expansions. This results in firms' disinvestment during recessions being greater than their increase in investment during expansions.…”