R&D Cyclicality and Credit Constraints : Comparative Micro-Evidence from New EU Member States

The opportunity cost approach suggesting a countervailing cyclical effect between R&D and short-term investments is the subject of theoretical and empirical debate. The lack of firm-level panel data on R&D and ambiguous indicators for demand fluctuations has hindered empirical testing of theories suggesting pro- or countercyclical R&D in interaction with credit constraints. Our contribution provides comparative firm-level evidence for the effect of credit constraints and demand fluctuations on firms' R&D. We use micro-data of manufacturing firms from new EU member states drawn from Business Environment and Enterprise Performance survey (BEEPs) conducted by the EBRD and the World Bank; and Community Innovation Survey (CIS) conducted by national statistical offices. The first one (BEEPs) is superior in measuring firm finances and credit constraints, and the second one (CIS) might be favoured for measuring firm innovation activities and factors hampering innovation. Both datasets are cross-sectional by construction but contain modest dynamics in demand – real growth in firms' sales over recent three years.Our results on two independently conducted surveys (BEEPs and CIS4) show surprisingly similar negative effect of credit constraints and a resembling positive effect of subsidies upon firm R&D activity in new EU member states. Also the direct effect of real sales growth serving as a demand proxy returns highly comparable positive effect in both surveys, though the estimate remains insignificant in considerably smaller BEEPs sample. Disentangling the direct effects from R&D equation and indirect effects from credit constraints equation provides deeper insight. This approach implies that foreign ownership promotes R&D due to relieved credit constraints, whilst reducing the incentives to conduct R&D per se. Finally, the real sales growth is no straightforward measure for tackling the R&D cyclicality puzzle. Firm sales growth not only captures the demand, but also strengthens firm financial standing via improved liquidity and reduces credit constraints. Whilst the last effect is more obvious and has expected positive impact upon R&D, the direct effect – interaction between R&D incentives and demand fluctuations – is still open for debate