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