Notes

In a competitive environment, firms are forced to adopt strategies in order to confront competition, increase profitability and market share. R&D investment has an essential role in these strategies, although it has distinguishing characteristics from other investments. Since more than half of the investments are associated with salaries of skilled – expert workers and scientists, the degree of uncertainty associated with its output may influence the investment rate over time (Hall, 2000). R&D investment generates profits with a time lag (Aboody and Lev, 2001; Jefferson, 2006), and hence should be sustained at a certain level (Hall 2002).

First of all, a research may take a few years to complete. After completion, it may take a couple of years to start showing results (Griliches, 1979).This may be one of the most important reasons to check variation over time and to research more than 5 years of firm level data. Some of the
studies use 15 years of data.

the relationship between firms’ performance and the explanatory variables is modeled as follows:
Profitability = f(research and development, control variables)
Where GPSL stands for profitability, RDTA with one and two lags stands for research and
development and SIZE, LFA and CGSINV as control variables.
R&D stock to total assets, denoted as RDTA
gross profit to sales ratio (GPSL)
the cost of goods sold to inventories ratio denoted as CGSINV
the logarithm of fixed assets (LFA)
the size of the firm proxied by the logarithms of sales (SIZE)

The difficulty on modeling such a research is that many of the R&D
expenditures are calculated in the income statements as production costs and not
specifically as an R&D figure.


Most of the times, R&D and innovation is an
intangible asset that has to do with entrepreneurship and the owner’s innovative ideas.
Many of the assets bought for production, involve high technology and R&D, but the extra
value is paid as a product and is not calculated in the balance sheet. The companies should
calculate this extra value and take it into account in the intangibles, with annual
depreciation, and not just calculate it as expenses in the income statement



The impact of current R&D on current productivity depends crucially on past R&D
(Griliches, 1979)
We consider three strategic options. The first is to spend nothing on R&D, leaving the generation of new ideas to imitation and other forms of knowledge spillovers. The second type of strategy is to carry out R&D projects occasionally, while the third strategy is to follow a plan of persistent R&D efforts. These distinctions are transformed into a prime research question: Is there an observable impact of a firm’s R&D strategy and its performance, measured by its labor productivity or gross profit per employee?

R&D spending is included in its labor costs, and hence it is recorded as input twice and thereby forcing parameter estimates downwards. To examine this problem, our study divides labor input into two categories: ordinary labor and knowledge labor.

Knowledge labor (or knowledge-intensive labor) has a significant impact on performance.

Occasional R&D is not associated with any positive R&D effect, which indicates that occasional R&D is chosen by firms that have productivity problems