The Causality Between R&D and Investment

Tue aim of this paper is to investigate the relationship between R&D expenditure and invest· ment in machinery and equipment in order to test for causality. New growth theory empha­ sises the role of R&D in creating blueprints needed to produce new capita! goods implicitly assuming causality running from R&D to investment. Other recent studies using finn leve! data bave investigated the The relationship between innovative activity and investment in flxed capita!. In this paper we use aggregate data from the US economy on R&D expenditure in the industrial sector and aggregate investment in machinery and equipment Standard Granger causality tests, together with the Hsiao version, are then performed, showing that causality runs from R&D to investment. Inaddition we perform a cointegration analysis allowing a test of possible long-run feedbacks. This dynamic representation shows that any feedback between investment and R&D is only signiflcant in the long run.