The relationship between R&D and physical investment of firms in science-based industries

This study is motivated by the one-way-inducement hypothesis that R&D induc es (Granger-causes) physical investment, but physical investment does not i nduce R&D, raised by Lach and Schankerman (1989) and Lach and Rob (1996). I t is demonstrated that their results do not hold, after extending the sampl e that matches their criteria by including more time periods and/or more fi rms. Namely, it is found that the Granger causality between R&D and physica l investment occurs both ways. It is also shown that their contemporary rel ationship, derived by dynamic simultaneous expressions, is positive in both ways, from current R&D to current physical investment and from current phy sical investment to current R&D. Moreover, previous R&D affects current phy sical investment, and previous physical investment also affects current R&D .