The 37 reference contexts in paper Christopher F Baum, Mustafa Caglayan, Oleksandr Talavera (2012) “R&D Expenditures and Geographical Sales Diversification” / RePEc:boc:bocoec:794

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    bring additional intangible benefits which may help firms overcome barriers to exporting.3In particular, given the availability of detailed firm-level data on export sales, researchers have begun to investigate the linkages between R&D expenditures and firms’ export behavior. Yet, this line of research has mostly focused on the question of whether R&D affects firms’ exports. However, as
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    Harris & Moffat (2011)
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    suggest, exporting does not require prior R&D innovation. It is also recognized that exporting firms may access strategic knowledge, as exporting allows them to improve their innovative capacities.4 In this paper, in contrast to much of the literature, we hypothesize that firms operating in diversified export markets are more likely to engage in R&D activities.
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    It is also recognized that exporting firms may access strategic knowledge, as exporting allows them to improve their innovative capacities.4 In this paper, in contrast to much of the literature, we hypothesize that firms operating in diversified export markets are more likely to engage in R&D activities. According to
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    Porter (1990),
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    innovation can help a firm achieve a competitive advantage in international markets over potential competitors. Kotabe (1990) suggests that multinational firms may have better access to global resources to enhance their innovative capabilities.5In particu2See Acs & Audretsch (1988), Mairesse & Mohnen (2005). 3See, for instance, Cohen & Levinthal (1989), Teece & Pisano (1998), and Harris & Li (200
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    knowledge, as exporting allows them to improve their innovative capacities.4 In this paper, in contrast to much of the literature, we hypothesize that firms operating in diversified export markets are more likely to engage in R&D activities. According to Porter (1990), innovation can help a firm achieve a competitive advantage in international markets over potential competitors.
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    Kotabe (1990)
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    suggests that multinational firms may have better access to global resources to enhance their innovative capabilities.5In particu2See Acs & Audretsch (1988), Mairesse & Mohnen (2005). 3See, for instance, Cohen & Levinthal (1989), Teece & Pisano (1998), and Harris & Li (2009). 4See, for example, Bishop & Wiseman (1999) and Blind & Jungmittag (2004). 5Research has also shown that multinational compa
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    According to Porter (1990), innovation can help a firm achieve a competitive advantage in international markets over potential competitors. Kotabe (1990) suggests that multinational firms may have better access to global resources to enhance their innovative capabilities.5In particu2See
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    Acs & Audretsch (1988), Mairesse & Mohnen (2005).
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    3See, for instance, Cohen & Levinthal (1989), Teece & Pisano (1998), and Harris & Li (2009). 4See, for example, Bishop & Wiseman (1999) and Blind & Jungmittag (2004). 5Research has also shown that multinational companies are more susceptible to agency costs, as monitoring of such companies is more challenging.
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    Kotabe (1990) suggests that multinational firms may have better access to global resources to enhance their innovative capabilities.5In particu2See Acs & Audretsch (1988), Mairesse & Mohnen (2005). 3See, for instance,
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    Cohen & Levinthal (1989), Teece & Pisano (1998), and Harris & Li (2009).
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    4See, for example, Bishop & Wiseman (1999) and Blind & Jungmittag (2004). 5Research has also shown that multinational companies are more susceptible to agency costs, as monitoring of such companies is more challenging.
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    Kotabe (1990) suggests that multinational firms may have better access to global resources to enhance their innovative capabilities.5In particu2See Acs & Audretsch (1988), Mairesse & Mohnen (2005). 3See, for instance, Cohen & Levinthal (1989), Teece & Pisano (1998), and Harris & Li (2009). 4See, for example,
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    Bishop & Wiseman (1999) and Blind & Jungmittag (2004).
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    5Research has also shown that multinational companies are more susceptible to agency costs, as monitoring of such companies is more challenging. Doukas & Pantzalis (2003) document that the effects of agency 3 lar, having access to a wider customer base may encourage a firm to innovate via increased R&D activities, as innovation allows the company to achieve strategic competitiveness.
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    capabilities.5In particu2See Acs & Audretsch (1988), Mairesse & Mohnen (2005). 3See, for instance, Cohen & Levinthal (1989), Teece & Pisano (1998), and Harris & Li (2009). 4See, for example, Bishop & Wiseman (1999) and Blind & Jungmittag (2004). 5Research has also shown that multinational companies are more susceptible to agency costs, as monitoring of such companies is more challenging.
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    Doukas & Pantzalis (2003)
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    document that the effects of agency 3 lar, having access to a wider customer base may encourage a firm to innovate via increased R&D activities, as innovation allows the company to achieve strategic competitiveness.
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    (2003) document that the effects of agency 3 lar, having access to a wider customer base may encourage a firm to innovate via increased R&D activities, as innovation allows the company to achieve strategic competitiveness. Nevertheless, the literature on the potential association between export market diversification and R&D activities is meager. To our knowledge, the only study is by
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    Hitt et al. (1997)
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    which investigates the linkages between innovation and firm performance, focusing on a cross section of 295 large US firms. They show that an entropy-based measure of international diversification has a positive effect on R&D intensity, measured as expenditures per employee (p. 785, Table 3).6However, most of the papers in this genre focus on the effects of R&D activities on firm performance rath
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    Our empirical model takes into account several firmspecific factors including the effects of foreign productive assets, size, leverage, cash holdings, costs on long term debt are exacerbated by the degree of firms’ foreign involvement (p. 89). Some researchers suggest global diversification can reduce shareholder wealth (e.g.,
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    Denis et al. (2002)),
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    while Doukas & Kan (2006) argue against this claim. 6Hitt et al. (1997) use averages of the data over 1998–1990 to smooth annual fluctuations in observed variables; see p. 778. 7Researchers have studied the effects of international diversifications on stock market valuation of firms: Dos Santos et al. (2008) find that a significant valuation discount applies to product diversification but not to i
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    Our empirical model takes into account several firmspecific factors including the effects of foreign productive assets, size, leverage, cash holdings, costs on long term debt are exacerbated by the degree of firms’ foreign involvement (p. 89). Some researchers suggest global diversification can reduce shareholder wealth (e.g., Denis et al. (2002)), while
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    Doukas & Kan (2006)
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    argue against this claim. 6Hitt et al. (1997) use averages of the data over 1998–1990 to smooth annual fluctuations in observed variables; see p. 778. 7Researchers have studied the effects of international diversifications on stock market valuation of firms: Dos Santos et al. (2008) find that a significant valuation discount applies to product diversification but not to international diversificati
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    model takes into account several firmspecific factors including the effects of foreign productive assets, size, leverage, cash holdings, costs on long term debt are exacerbated by the degree of firms’ foreign involvement (p. 89). Some researchers suggest global diversification can reduce shareholder wealth (e.g., Denis et al. (2002)), while Doukas & Kan (2006) argue against this claim. 6
    Exact
    Hitt et al. (1997)
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    use averages of the data over 1998–1990 to smooth annual fluctuations in observed variables; see p. 778. 7Researchers have studied the effects of international diversifications on stock market valuation of firms: Dos Santos et al. (2008) find that a significant valuation discount applies to product diversification but not to international diversification.
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    Some researchers suggest global diversification can reduce shareholder wealth (e.g., Denis et al. (2002)), while Doukas & Kan (2006) argue against this claim. 6Hitt et al. (1997) use averages of the data over 1998–1990 to smooth annual fluctuations in observed variables; see p. 778. 7Researchers have studied the effects of international diversifications on stock market valuation of firms: Dos
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    Santos et al. (2008)
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    find that a significant valuation discount applies to product diversification but not to international diversification. Ursacki & Vertinsky (1992) suggest that multinational banks may benefit from broadening the geographical scope of their business. 4 new equity issuance and cash flow to control for firm heterogeneity.
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    against this claim. 6Hitt et al. (1997) use averages of the data over 1998–1990 to smooth annual fluctuations in observed variables; see p. 778. 7Researchers have studied the effects of international diversifications on stock market valuation of firms: Dos Santos et al. (2008) find that a significant valuation discount applies to product diversification but not to international diversification.
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    Ursacki & Vertinsky (1992)
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    suggest that multinational banks may benefit from broadening the geographical scope of their business. 4 new equity issuance and cash flow to control for firm heterogeneity. In examining the role of export sales diversification on R&D expenditures, we specifically consider the impact of firm-level export sales in different regions of the world.
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    & Lerner, Josh (2009) who argue that firms’ R&D expenditures are smoothed to maintain their stability. 9There is significant research that examines the role of R&D expenditures on exports which has shown that R&D expenditures facilitate firms’ entry into export markets. See
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    Harris & Moffat (2011)
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    for an extensive review of this literature. 6 2. Literature Review It is well documented in the literature that in an imperfectly competitive market, an R&D–active firm can innovate, increase its productivity and gain a competitive edge over its rivals in the domestic and foreign markets.10As detailed data on firm-level exports and R&D expenditures have became availa
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    productivity and gain a competitive edge over its rivals in the domestic and foreign markets.10As detailed data on firm-level exports and R&D expenditures have became available, empirical researchers have provided more detailed account of the linkages between R&D expenditures, productivity and exports. For instance, researchers using data from several countries, including
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    Sterlacchini (2001), Bleaney & Wakelin (2002), Barrios et al. (2003), Ozcelik & Taymaz (2004),
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    Roper et al. (2006), Girma et al. (2008), and Harris & Li (2009), investigate whether R&D expenditures facilitate firms’ entry into export markets. The conclusion of this strand of literature is that firms that are heavily involved in R&D activities are more likely to be exporters.11 It is equally important to recognize the possibility that more vigorous competition and differing consumer prefere
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    data on firm-level exports and R&D expenditures have became available, empirical researchers have provided more detailed account of the linkages between R&D expenditures, productivity and exports. For instance, researchers using data from several countries, including Sterlacchini (2001), Bleaney & Wakelin (2002), Barrios et al. (2003), Ozcelik & Taymaz (2004), Roper et al. (2006),
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    Girma et al. (2008), and Harris & Li (2009),
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    investigate whether R&D expenditures facilitate firms’ entry into export markets. The conclusion of this strand of literature is that firms that are heavily involved in R&D activities are more likely to be exporters.11 It is equally important to recognize the possibility that more vigorous competition and differing consumer preferences in foreign markets may induce firms to carry out R&D activiti
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    It is equally important to recognize the possibility that more vigorous competition and differing consumer preferences in foreign markets may induce firms to carry out R&D activities so that they can improve their innovative capabilities and stay ahead of their rivals: i.e. the so calledlearning by exportinghypothesis.12However, there is only a handful of studies that evaluate this hypothesis.
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    Clerides et al. (1998)
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    argue that the stochastic processes that generate cost and productivity trajectories should improve with changes in exporting status if learning-by-exporting plays an important role. They provide evidence using data from Mexico, Colombia and Morocco.
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    Clerides et al. (1998) argue that the stochastic processes that generate cost and productivity trajectories should improve with changes in exporting status if learning-by-exporting plays an important role. They provide evidence using data from Mexico, Colombia and Morocco.
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    Salomon & Shaver (2005) and Aw et al. (2007)
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    recognize that learning-by-exporting can lead to increased innovation. Girma et al. (2008) investigate 10See along these lines Acs & Audretsch (1988), Cohen & Levinthal (1989), Cohen & Levinthal (1990), Teece & Pisano (1998), Mairesse & Mohnen (2005). 11The empirical literature cited above base their investigation on analytical models such as those developed by Posner (1961), Krugman (1979), Doll
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    et al. (1998) argue that the stochastic processes that generate cost and productivity trajectories should improve with changes in exporting status if learning-by-exporting plays an important role. They provide evidence using data from Mexico, Colombia and Morocco. Salomon & Shaver (2005) and Aw et al. (2007) recognize that learning-by-exporting can lead to increased innovation.
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    Girma et al. (2008)
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    investigate 10See along these lines Acs & Audretsch (1988), Cohen & Levinthal (1989), Cohen & Levinthal (1990), Teece & Pisano (1998), Mairesse & Mohnen (2005). 11The empirical literature cited above base their investigation on analytical models such as those developed by Posner (1961), Krugman (1979), Dollar (1986), Greenhalgh et al. (1994), Grossman & Helpman (1995). 12See Greenaway & Kneller (2
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    They provide evidence using data from Mexico, Colombia and Morocco. Salomon & Shaver (2005) and Aw et al. (2007) recognize that learning-by-exporting can lead to increased innovation. Girma et al. (2008) investigate 10See along these lines
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    Acs & Audretsch (1988), Cohen & Levinthal (1989), Cohen & Levinthal (1990), Teece & Pisano (1998), Mairesse & Mohnen (2005).
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    11The empirical literature cited above base their investigation on analytical models such as those developed by Posner (1961), Krugman (1979), Dollar (1986), Greenhalgh et al. (1994), Grossman & Helpman (1995). 12See Greenaway & Kneller (2007) and Wagner (2005) for a survey of the productivity and exports literature. 7 the bidirectional relationship between R&D and export activity and finds that w
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    Girma et al. (2008) investigate 10See along these lines Acs & Audretsch (1988), Cohen & Levinthal (1989), Cohen & Levinthal (1990), Teece & Pisano (1998), Mairesse & Mohnen (2005). 11The empirical literature cited above base their investigation on analytical models such as those developed by
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    Posner (1961), Krugman (1979), Dollar (1986), Greenhalgh et al. (1994), Grossman & Helpman (1995).
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    12See Greenaway & Kneller (2007) and Wagner (2005) for a survey of the productivity and exports literature. 7 the bidirectional relationship between R&D and export activity and finds that while previous exporting experience enhances the innovative capability of Irish firms, this is not true for the British firms in their sample.
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    Girma et al. (2008) investigate 10See along these lines Acs & Audretsch (1988), Cohen & Levinthal (1989), Cohen & Levinthal (1990), Teece & Pisano (1998), Mairesse & Mohnen (2005). 11The empirical literature cited above base their investigation on analytical models such as those developed by Posner (1961), Krugman (1979), Dollar (1986), Greenhalgh et al. (1994), Grossman & Helpman (1995). 12See
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    Greenaway & Kneller (2007) and Wagner (2005)
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    for a survey of the productivity and exports literature. 7 the bidirectional relationship between R&D and export activity and finds that while previous exporting experience enhances the innovative capability of Irish firms, this is not true for the British firms in their sample.
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    (1986), Greenhalgh et al. (1994), Grossman & Helpman (1995). 12See Greenaway & Kneller (2007) and Wagner (2005) for a survey of the productivity and exports literature. 7 the bidirectional relationship between R&D and export activity and finds that while previous exporting experience enhances the innovative capability of Irish firms, this is not true for the British firms in their sample.
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    Hall et al. (2009)
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    show that enhanced international competition leads to higher levels of R&D, while Damijan et al. (2010) find that exporting influences innovation. More recently, Aw et al. (2011) develop a dynamic framework to model exporting and R&D and show that current R&D directly impacts the probability of exporting, while current exporting alters the return to R&D.
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    Wagner (2005) for a survey of the productivity and exports literature. 7 the bidirectional relationship between R&D and export activity and finds that while previous exporting experience enhances the innovative capability of Irish firms, this is not true for the British firms in their sample. Hall et al. (2009) show that enhanced international competition leads to higher levels of R&D, while
    Exact
    Damijan et al. (2010)
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    find that exporting influences innovation. More recently, Aw et al. (2011) develop a dynamic framework to model exporting and R&D and show that current R&D directly impacts the probability of exporting, while current exporting alters the return to R&D.
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    relationship between R&D and export activity and finds that while previous exporting experience enhances the innovative capability of Irish firms, this is not true for the British firms in their sample. Hall et al. (2009) show that enhanced international competition leads to higher levels of R&D, while Damijan et al. (2010) find that exporting influences innovation. More recently,
    Exact
    Aw et al. (2011)
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    develop a dynamic framework to model exporting and R&D and show that current R&D directly impacts the probability of exporting, while current exporting alters the return to R&D. They present evidence that exporting enhances productivity, while exporting firms invest more in R&D.
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    -by-exporting becomes even more crucial for firms exporting to countries further distant from their home markets, as they will face more competitive pressures and different consumer preferences.13We expect that as firms expand their export markets to different regions then their own, they may devote more resources to innovation in the form of R&D expenditures. Along these lines,
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    Hitt et al. (1997)
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    focus on a cross section of 295 large US firms and show that international diversification has a positive effect on R&D intensity (p. 785, Table 2).14Yet, to our knowledge, there are no other studies that explore the importance of diversification of export markets on the firm’s R&D activities, as most of the research in this genre focuses on the effects of diversification on firm performance. 2.1.
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    Methodological Issues An important methodological issue arises when considering the modeling of our dependent variable, the ratio of R&D expenditures to total assets (TA), which is bounded from below. In any sample of firm-level data, it is likely that a number of firms will report zero values 13It is equally possible as
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    Kotabe (1990)
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    suggests that diversified firms have easier access to financial resources allowing them to smooth their R&D expenditures. 14Also see Van Biesebroeck (2005) and De Loecker (2007) who find that productivity increases after firms enter the export market in Ivory Coast and Slovenia, respectively. 8 for this category of expenditure in a given year.
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    In any sample of firm-level data, it is likely that a number of firms will report zero values 13It is equally possible as Kotabe (1990) suggests that diversified firms have easier access to financial resources allowing them to smooth their R&D expenditures. 14Also see Van
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    Biesebroeck (2005) and
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    De Loecker (2007) who find that productivity increases after firms enter the export market in Ivory Coast and Slovenia, respectively. 8 for this category of expenditure in a given year. However, in a standard regression context, the empirical distribution of the series due to the prevalence of zero values is neglected.
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    In any sample of firm-level data, it is likely that a number of firms will report zero values 13It is equally possible as Kotabe (1990) suggests that diversified firms have easier access to financial resources allowing them to smooth their R&D expenditures. 14Also see Van Biesebroeck (2005) and De
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    Loecker (2007)
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    who find that productivity increases after firms enter the export market in Ivory Coast and Slovenia, respectively. 8 for this category of expenditure in a given year. However, in a standard regression context, the empirical distribution of the series due to the prevalence of zero values is neglected.
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    (2005) and De Loecker (2007) who find that productivity increases after firms enter the export market in Ivory Coast and Slovenia, respectively. 8 for this category of expenditure in a given year. However, in a standard regression context, the empirical distribution of the series due to the prevalence of zero values is neglected. In confronting this issue, some authors (e.g.,
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    Czarnitzki & Toole (2011))
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    have made use of censored normal regression techniques such as the Tobit model. In our empirical investigation we, too, make extensive use of the Tobit model. The second difficulty in estimating the effects of diversification on R&D expenditures is the endogeneity problem.
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    In this case we face the crucial problem of endogeneity which leads to biased estimates, as some explanatory variables are not orthogonal to the error process. We employ two approaches to address this important issue. First, we make use of the instrumental variables maximum likelihood Tobit estimator
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    (Miranda & Rabe-Hesketh (2006)),
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    employing second and third lags of endogenous variables as instruments. The validity of these instruments is gauged by an overidentification test. Second, we consider reverse causality as a robustness check, and reestimate the model using the diversification measure as the dependent variable.15 3.
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    The highest possible value of this measure is 0.75, which corresponds to a HHI of 0.25, representing equal sales in each region. Our second diversification measure is entropy-based and quantifies the expected value of the information contained in a specific realization of the random variable.16 16See
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    Shannon (1948)
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    for more along these lines. Note that Hitt et al. (1997) also implement this measure. 10 The measure takes the following form: Diversification Entropyit=− ∑n r=1 xr,i,tlog(xr,i,t) where in the case ofxr,i,t= 0 for someiandt, the value of the corresponding term is taken to be 0, which is consistent with the well-known limit thatlimp→0+(plogp) = 0.
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    Our second diversification measure is entropy-based and quantifies the expected value of the information contained in a specific realization of the random variable.16 16See Shannon (1948) for more along these lines. Note that
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    Hitt et al. (1997)
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    also implement this measure. 10 The measure takes the following form: Diversification Entropyit=− ∑n r=1 xr,i,tlog(xr,i,t) where in the case ofxr,i,t= 0 for someiandt, the value of the corresponding term is taken to be 0, which is consistent with the well-known limit thatlimp→0+(plogp) = 0.
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    These results are not surprising: (i) R&D investment contributes to the stock of intangible capital and cannot be used as collateral; and (ii) R&D expenditures have a lengthy and highly uncertain payback. In our investigation, we also consider the findings of
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    Brown et al. (2009) and Carpenter & Petersen (2002)
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    as we evaluate whether new equity issuance plays an important role, over and above the effects of leverage and cash holdings. This is reasonable, as financing R&D activities through the issuance of equity may be particularly important for those firms that are severely restricted due to inadequate internal funds.
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    Though it would be interesting to examine factors that promote homeversusforeign R&D activities as data become available, our main concern is the behavior of firms’ total R&D expenditures. 25For an overview of this literature, see
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    Baum et al. (2013).
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    16 tion; (ii) the possibility of reverse causality; (iii) the subset of positive R&D firms as we scrutinize both directions of causality; and (iv) separating domestic sales from exports to other European markets. 4.3.
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    indicate that this is perhaps the most important distinguishing characteristic of R&D investment, and leads to firms’ smoothing R&D spending over time so that they may retain their skilled human capital. In the context of instrumental variables Tobit modeling, adding the lagged dependent variable to capture the smooth behavior of R&D expenditures leads to a downward bias in the estimates (see
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    Greene (2004)).
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    However, this bias is likely to decline as the time series dimension of the panel increases. Given that most firms in our data have a reasonably long time series (1990–2008), the effect of this bias can be expected to be minimal.
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    of the lagged dependent variable is positive and significant, suggesting that those firms that are involved in R&D activities in the previous period tend to continue their R&D programme in subsequent periods. However, the extent of persistence does not seem to be high, as the coefficient is on the order of 26We have also experimented by estimating the dynamic specification by employing the
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    Wooldridge (2005)
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    approach. Unfortunately, in most cases we encountered convergence problems. As a consequence we proceeded with standard instrumental variable Tobit results. 17 0.44–0.45. When we focus on the coefficient of the diversification index, regardless of the measure used, we find that it has a positive sign for both panel and industry based cash flow deviations.
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