A failure-inducement model of research and development expenditure: Italian evidence from the early 1980s

Abstract Empirical evidence for the Schumpeterian suggestion of a positive relationship between profitability and innovative effort is slim. In fact, the opposite is often suggested. An alternative ‘failure-inducement’ hypothesis, argues that firms make innovative efforts when performance falls below a minimum threshold, resulting in a negative relationship between profitability and R&D expenditures. Data on R&D expenditures in Italian industry in the early 1980s- a period of severe economic crisis - show that both hypotheses are relevant for firms whose profits are well above or well below average, respectively.