Uncertainty and Innovation: The impact of macroeconomic volatility on R&D in Argentina during the 1990s

ARZA, VALERIA

Copenague, Dinamarca

Conferencia; DRUID Summer Conference 2006; 2006

Uncertainty about the near-future manifestation of relevantmacroeconomic variables influence expectations about future returnsand affect firms’ investment behaviour. Due to the fact thatinvestment decisions are partially irreversible, the literature predictedand often found a negative impact of macroeconomic uncertainty oninvestment. However, R&D investment has particular characteristics.Therefore, macroeconomic uncertainty might affect investment inR&D differently to how it does affect other types of investment.The paper claims that investment decisions related to R&D will notchange in response to uncertainty related to specific dimensions of themacroeconomic system. In relation to R&D projects, firms valuepersistent behaviour and they will not be able to assess the final effecton the future returns of those projects in response to changes inspecific macroeconomic conditions. However, when uncertaintyprevails about the sustainability of the economic regime as a whole,called here structural uncertainty, then firms might adopt defensivestrategies and abandon completely (or reduce dramatically) their longtermprojects, included investment in R&D.The empirical analysis is carried out using panel data for Argentineanfirms from 1992 to 2001. Tobit models were estimated for firms’investment in R&D using as explanatory variables different indicatorsof specific macroeconomic uncertainty and an indicator of structuraluncertainty. Results suggest that investment R&D reacted negativelyto structural uncertainty but it was largely immune to most measuresof uncertainty related to specific dimensions of the macroeconomicsystem.Addressing the impact of structural uncertainty is particularly relevantfor developing countries, as they are often subject to swings in policyorientation. The paper’s policy implications suggest that while policyreducing uncertainty about the sustainability of the economic regimesupports firms’ R&D investment, conditions of stability in specificdimensions of the macroeconomic system do not induce furtherinvestment in R&D.