Modelling R&D expenditure data with zero observations: two-equation model

This article attempts to analyse the determinants of firms' Research and Development (R&D) expenditures in Korea by considering the business environment after the economic crisis in 1997. In addition, to take into account zero R&D expenditure, this article employed a two-equation model unlike models used in other studies. This method incorporates a two-level decision structure: the participation decision and the decision on the amount to spend once the issue of participation has been decided. According to the estimation results, while the proposition that larger firms are more active in R&D is true, the proposition that firms that possess market power are more active in R&D is not true for Korea. Technical cooperation among Korean firms seems to be less active than in other countries. In addition, the results indicate that foreign investment stimulates the firms' R&D expenditure. Furthermore, a number of factors were found to play a role in promoting firms' R&D activities: the external conditions of the firms' R&D activities, including the location, other firms' R&D activities in the same industry, support from the government and technical support from research institutes.