Three Essays on Research & Development, Patent Rights, and Licensing: Evidence from International Firm-Level Data

This study focus on ways to spur innovation by increasing the level and productivity of Research and Development (R&D) investments. The study starts by examining the effects of business cycles and credit constraints on firm-level R&D investment behavior. Using the Hodrick and Prescott (1997) filter, it looks at the relationship between R&D expenditure and business cycles controlling for the cyclical and trend components of Gross Domestic Product (GDP) separately. The study further uses the Altman (1968) Z-probability of bankruptcy as a proxy for financial constraints. The results show that firm-level R&D expenditure is procyclical and that there are differences across countries. Although R&D expenditure is procyclical in all countries, R&D expenditure in developing countries depends on both the cyclical and trend components of GDP, while R&D expenditure in developed countries depends only on the trend component of GDP. Moreover, credit constraints are binding only in developing countries.Increasing spending on R&D over business cycles alone is not sufficient; R&D-intensive firms must use capital efficiently. Therefore, this study also looks at the efficiency of capital allocation among R&D-intensive firms. First, the study calculates the dispersion (using Gini coefficient and Theil Index) in Tobin’s q among R&D-intensive firms and non-R&D-intensive firms separately to measure capital allocation efficiency for each group. Second, it investigates the cyclical properties of capital allocation efficiency among R&D-intensive firms compared to that among non-R&D-intensive firms. The results show that the dispersion in Tobin’s q for R&D-intensive firms is higher than the dispersion in Tobin’s q for non-R&D-intensive firms, which means that capital allocation is less efficient among R&D-intensive firms. The results further show that the efficiency of capital allocation is countercyclical for both R&D-intensive firms and non-R&D-intensive firms. In other words, a positive GDP shock deteriorates the efficiency of capital allocation, and a negative GDP shock improves the efficiency of capital allocation, among both R&D-intensive firms and non-R&D-intensive firms. Moreover, although changes in private credit supply do not significantly affect capital allocation efficiency among non-R&D-intensive firms, a positive credit supply shock improves the efficiency of capital allocation among R&D-intensive firms.Patent rights are also important to encourage firms to invest in R&D and spur innovation. Therefore, this study lastly focuses on ways to increase firm-level R&D expenditure by implementing appropriate patent protection regimes which may depend on characteristics of an industry. Specifically, the study investigates how the strength of a patent protection regime impacts R&D expenditure in industries with different levels of licensing. The results show that the impact of strengthening patent protection on R&D expenditure depends on firms’ licensing environment and that the increase in R&D in response to a stronger patent protection regime is smaller in “complex” industries, where licensing is widespread, than in industries where licensing is not used as often to access innovations.