7/2011 Kadri Männasoo and Jaanika Meriküll. R&D in boom and bust: Evidence from the World Bank financial crisis survey

Working Papers of Eesti Pank. No. 7/2011

The full implications of the global financial crisis of 2008-2009 are yet to be revealed. The crucial question is whether a crisis of such severe magnitude will set "cleansing mechanisms" into motion as suggested by the opportunity cost argument of R&D, or rather destroy the long-term productivity enhancing incentives? The World Bank Financial Crisis Survey collects direct self-reported measures of firms' credit frictions and R&D during 2009-2010 from six countries: Bulgaria, Latvia, Lithuania, Hungary, Romania and Turkey. Employing this dataset, we seek evidence of how the firms' R&D responded to the negative demand shock and credit contraction at the time of the crisis. Looking at two distinct episodes, the sustained economic growth in 2001-2007 and the sudden slump in 2009-2010, we observe a paradigm shift in firms' R&D decisions: whilst the R&D is counter-cyclical during the pre-crisis period, a pro-cyclical pattern emerges during the crisis.
JEL Code: G31, E32, O30, O52
Key words: R&D cyclicality, demand shocks, credit constraints, financial crisis

* Kadri Männasoo is a senior researcher at Tallinn University of Technology and a visiting researcher at Eesti Pank. Jaanika Meriküll is a researcher at Eesti Pank. The research contribution of Kadri Männasoo has been supported by Estonian Science Foundation grant project No. ETF8796. The authors thank Aurelijus Dabušinskas, Martti Randveer, Karsten Staehr and other participants in seminars for their insightful comments. Any errors remain the responsibility of the authors.

Authors' e-mail addresses: kadri.mannasoo [at] eestipank.ee, jaanika.merikyll [at] eestipank.ee

The views expressed are those of the authors and do not necessarily represent the official views of Eesti Pank.

Contents

1. Introduction
2. The cyclicality of R&D
3. Credit frictions
4. Empirical analysis and results
4.1. Methodology
4.2. Data
4.3. Implications of the global financial crisis
5. Summary
References
Appendix

R&D in boom and bust: Evidence from the World Bank Financial Crisis Survey, Working Papers of Eesti Pank No 7/2011 (PDF)