Modelling R&D expenditure data with zero observations: Two-equation model

Joo Suk Lee, Seung Hoon Yoo, Seung Jun Kwak

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2 Citations (Scopus)


This article attempts to analyse the determinants of firms' Research and Development (R&D) expenditures in Korea by considering the business environment after the economic crisis in 1997. In addition, to take into account zero R&D expenditure, this article employed a two-equation model unlike models used in other studies. This method incorporates a two-level decision structure: the participation decision and the decision on the amount to spend once the issue of participation has been decided. According to the estimation results, while the proposition that larger firms are more active in R&D is true, the proposition that firms that possess market power are more active in R&D is not true for Korea. Technical cooperation among Korean firms seems to be less active than in other countries. In addition, the results indicate that foreign investment stimulates the firms' R&D expenditure. Furthermore, a number of factors were found to play a role in promoting firms' R&D activities: the external conditions of the firms' R&D activities, including the location, other firms' R&D activities in the same industry, support from the government and technical support from research institutes.

Original languageEnglish
Pages (from-to)717-727
Number of pages11
JournalApplied Economics
Issue number6
Publication statusPublished - 2011 Mar

Bibliographical note

Funding Information:
There has been growing recognition among policymakers of the importance of R&D activities to the competitiveness of national and regional economies. Therefore, governments in many countries are providing public and quasi-public support instruments aimed at assisting firms with their R&D-related needs. Gans and Stern (2000) and Hall (2002) showed that because the benefit of R&D is so uncertain, support from the government could decrease a firm’s R&D investment risks, hence inducing more investment. Lerner (1999) also demonstrated that a grant from the US Small Business Innovation Research Program (SBIRP) encouraged firms with R&D expenditure and innovation activities. However, according to the result of Wallsten (2000), the SBIRP grants crowded out firm-financed R&D expenditure. Busom (2000) showed that about 30% of the firms supported by the government reduced R&D expenditure in Spain.

ASJC Scopus subject areas

  • Economics and Econometrics


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