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Innovation activity, R&D incentives, competition and market value.

Fantino, Davide (2010) Innovation activity, R&D incentives, competition and market value. PhD thesis, The London School of Economics and Political Science (LSE).

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Abstract

This thesis examines some characteristics of the interaction between innovation activity of firms, in particular R&D, and economic system. The first main chapter analyses a mechanism of interaction between R&D and market structure, in a horizontally differentiated market where firms invest to increase differentiation among varieties. R&D activity declines over time; prices, output and short-run profits of firms producing the differentiated product move towards the higher steadystate values, production of the non-differentiated good falls. The increasing specialization improves the overall utility of consumers. The comparison with the socially optimal solution shows that firms underinvest in R&D. The second main chapter evaluates the effectiveness of the incentives to development of innovations provided by the Italian Ministry for Economic Development through the Fund for Technological Innovation. We analyse the subsidies to firms supplied by the general and the special sections of this Fund, using a difference-in-differences framework and a regression discontinuity one. We find no hints of effect on investments, dimension, labour productivity, labour costs, financial structure and profitability. For the general section, the effect on assets is positive, suggesting that firms used the subsidy to finance current expenditures. The third main chapter examines the relationship between R&D and market value of firms. We find high heterogeneity in the coefficients of different US manufacturing sectors between 1975 and 1995; sometimes the effects of current R&D on market value are very small or negative. We develop a model with uncertain R&D, where we decompose market value in two components, due to the already concretized assets and to work-in-progress R&D. Risk aversion may cause different evaluations of these components: when investors are risk-averse and managers maximize the long-run firm value, the risk associated with work-in-progress R&D reduces the short-run firm value even if its expected long-run value grows.

Item Type: Thesis (PhD)
Additional Information: © 2010 Davide Fantino
Library of Congress subject classification: H Social Sciences > HD Industries. Land use. Labor
Sets: Departments > Economics
URI: http://etheses.lse.ac.uk/id/eprint/166

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