Firm Growth and R&D Expenditure

We apply a panel vector autoregression model to a firm-level longitudinal databaseto observe the co-evolution of sales growth, employment growth, profits growth andgrowth of R&D expenditure. Contrary to expectations, profit growth seems to havelittle detectable effect on R&D investment. Instead, firms appear to increase their totalR&D expenditure following growth in sales and growth of employment. In a sense, firmsbehave ‘as if’ they aim for a roughly constant ratio of R&D to employment (or sales).We observe heterogeneous effects for growing or shrinking firms however, suggesting thatfirms are less willing to reduce their R&D levels following a negative growth shock thanthey are willing to increase R&D after a positive shock...