9/2011 Kadri Männasoo and Jaanika Meriküll. How do demand fluctuations and credit constraints affect R&D? Evidence from Central, Southern and Eastern Europe

Working Papers of Eesti Pank. No. 9/2011

The opportunity cost approach suggesting a countervailing cyclical effect between R&D and short-term investments is the subject of theoretical and empirical debate. We extend the discussion by investigating the impact of demand fluctuations and credit constraints on firms' R&D in ten new EU member states from Central, Southern and Eastern Europe (CSEE). Using membership of the OECD as a proxy for the country's level of development we find more counter-cyclicality amongst the firms in non-OECD CSEE countries, while a similar but somewhat less accentuated counter-cyclical pattern of R&D behaviour emerges in the more advanced OECD-CSEE countries. Surprisingly, any adverse effect from credit constraints on firm's engagement in R&D is largely absent in CSEE countries.
JEL Code: G31, E32, O30, O52
Key words: R&D cyclicality, demand shocks, credit constraints, Central and Eastern Europe

*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 Martti Randveer, Karsten Staehr and other seminar participants 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. R&D in more and less advanced CSEE countries
5. Summary
References
6. Appendices

How do demand fluctuations and credit constraints affect R&D? Evidence from Central, Southern and Eastern Europe, Working Papers of Eesti Pank No 9/2011 (PDF)