The effect of demand shocks on firm-financed R&D

Abstract Some economists have suggested that firms have an incentive to clump inventive activity into recessions because the opportunity cost of inventive activity is low when the price of output is low. Other economists, emphasizing cash-flow constraints, argue that inventive activity should fall during recessions. This paper tests these competing hypotheses using firm-level R&D efforts as the measure of inventive activity. We measure demand for a firm's product as a weighted average of industry shipments and test whether shocks to this measure of demand stimulate or retard firm-level R&D. The results suggest that an opportunity-cost effect may exist for firms with the largest R&D budgets.