Internal funding determinants of R&D expenditures for U.S. mature firms

Abstract

Since research and development (R&D) investment identified as the main factor for economic development in contemporary endogenous models, many studies investigated the determinants of such investment. Though there is no disagreement that internal financing sources are vital for R&D expenditures (at least for matured firms), there are still ongoing discussions as to which of them takes priority: Revenue or cash flows. This paper analyses the impact of firms’ revenue and cash flow on R&D expenditures by employing a dynamic linear model. Also, we use the Vector Error Correction Model to test the variance composition. Our research confirms that, in the beginning, positive revenue dynamics serve as the most critical signal for business to invest in R&D activity. However, later profit that firms earn comes to the first place in the ladder of their motivation.