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Accelerability vs. scalability : R&D investment under financial constraints and competition
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Lin, Danmo (2023) Accelerability vs. scalability : R&D investment under financial constraints and competition. Management Science, 69 (7). pp. 4078-4107. doi:10.1287/mnsc.2022.4503 ISSN 0025-1909.
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Official URL: http://dx.doi.org/10.1287/mnsc.2022.4503
Abstract
I develop a continuous-time model to examine how the interaction between competition and financial constraints affects firms’ research and development (R&D) strategies. The model integrates two key characteristics of R&D investment: accelerability (i.e., higher R&D intensity leads to faster discovery) and scalability (i.e., higher R&D intensity leads to higher project payoff). I find that firms react strategically to their rivals’ financial constraints when making investment decisions in a duopoly R&D race. In particular, firms respond positively to the R&D intensity of an unconstrained rival, while they respond in a hump-shaped fashion to the R&D intensity of a constrained rival. As a result, a constrained firm can pre-empt an unconstrained competitor in market equilibrium. Accelerability is necessary for such pre-emption to occur, and scalability generally reduces its likelihood. Comparison with a monopoly benchmark shows that the economic mechanism differs from over-investment induced by financial constraints alone. The model also generates new implications regarding how project characteristics and cash flow risks impact R&D decisions.
Item Type: | Journal Article | ||||||||
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Subjects: | H Social Sciences > HF Commerce H Social Sciences > HG Finance |
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Divisions: | Faculty of Social Sciences > Warwick Business School > Finance Group Faculty of Social Sciences > Warwick Business School |
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Library of Congress Subject Headings (LCSH): | Investments , Investments -- Research, Business enterprises , Business enterprises -- Finance, Cash flow | ||||||||
Journal or Publication Title: | Management Science | ||||||||
Publisher: | Institute for Operations Research and the Management Sciences (I N F O R M S) | ||||||||
ISSN: | 0025-1909 | ||||||||
Official Date: | July 2023 | ||||||||
Dates: |
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Volume: | 69 | ||||||||
Number: | 7 | ||||||||
Page Range: | pp. 4078-4107 | ||||||||
DOI: | 10.1287/mnsc.2022.4503 | ||||||||
Status: | Peer Reviewed | ||||||||
Publication Status: | Published | ||||||||
Access rights to Published version: | Open Access (Creative Commons) | ||||||||
Date of first compliant deposit: | 11 October 2022 | ||||||||
Date of first compliant Open Access: | 11 October 2022 |
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