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 induces (Granger-causes) physical investment, but physical investment does not induce R&D, raised by Lach and Schankerman (1989) and Lach and Rob (1996). It is demonstrated that their results do not hold, after extending the sample that matches their criteria by including more time periods and/or more firms. Namely, it is found that the Granger causality between R&D and physical investment occurs both ways. It is also shown that their contemporary relationship, derived by dynamic simultaneous expressions, is positive in both ways, from current R&D to current physical investment and from current physical investment to current R&D. Moreover, previous R&D affects current physical investment, and previous physical investment also affects current R&D.