Inflation and R&D investment

Par Rodrigo Costamagna
This paper aims to complement the literature on research and development (R&D) investments by exploring the potential effects of the inflation rates behavior on firm’s ability to invest in R&D, a simple and specific relationship that has received little attention in the related literature. Inflation is expected to affects firm’s incentives to engage in the allocation of resource to R&D projects due to price instability and future pay-off uncertainty. This paper found empirical evidence of the negative effects of high inflation rates on business’ R&D investments. Also, the cross-section estimates showed a negative and highly significant impact of inflation on R&D investments in low-and middle-income countries as expected. Thus, our findings send a message of caution to policy makers regarding the incentives designed to promote innovation as growth basis of countries.
JEL Codes: O31, E31, C23
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