Research and Development Activity and Profitability: A Distributed Lag Analysis

There are at least three ways in which profits and R & D may be related. First, profits may influence subsequent R & D. Second, R & D may influence subsequent profits. And third, it is possible that R & D and profits are influenced simultaneously by some third factor. For example, government support or exogenous surges in demand could increase both at the same time. Although the first two of these relations involve influences of one variable on another over time, the problem of distinguishing between a simultaneous and a recursive relation has not been tackled in previous work. The current study employs distributed lag techniques with pooled time-series and cross-section data to discriminate among the alternative types of time relations. A sample of seven industries containing 111 firms covering the 1950-65 period was used to test these relations. The results indicate a tendency for R & D to influence future profitability and to be influenced by past profitability.