Sources of Finance, R&D Investment and Productivity: Correlation or Causality? 1

In general there is an agreement about the positive impacts of R&D on performance of firms measured as productivity growth, profitability and growth. However, the opposite relationship is less obvious and very little attention has been paid on examining the feedback from performance on R&D investment. This study contributes to the empirical analysis of a two-way causal relationship between R&D investment and performance at the firm level. We examine the interaction between a number of financial indicators represented by investments in R&D and tangible capital and a number of performance variables including sales, value added, profit, cash flow, capital structure and employment. Empirical results are based on a large panel data set of Swedish manufacturing firms over the period 1992-2000. The results show evidence of weak feedback effects from performance on investment