Victor Wang
The cost of research and development is a topic rarely explored for developing nations. The ability for a developing nation's firms to acquire capital to invest in R&D is reflected by the government's policies toward innovation, conditions affecting the acquisition of funds within the firm, conditions affecting the acquisition of funds outside the firm, and the availability of venture-capital financing and capital gains taxation. This thesis provides a compilation of some of the vast amount of
more » ... the vast amount of economic literature on R&D, a unique framework surrounding the effect of cost on R&D, and an empirical test of the importance of the availability of capital as a determinant of R&D. The cost variables used include firm data on the annual borrowings, leverage, subsidies and grants, and interest rates. In addition, annual sales data, the age of the firm, and the Herfindahl-Hirschman Index (HHI) were used to include revenue-related aspects a firm faces that might affect R&D expenditure. Using an unbalanced Indian firm-level panel, the goal of this thesis is iii to analyze of the relationship between the cost of capital investment and R&D while also including revenue-related variables for the pesticide and fertilizer industries. The dataset used for this analysis comes from The Centre for Monitoring Indian Economy (CMIE) which includes 1989-90 until 2009-2010. In addition, it was supplemented with variables from IMF and survey data collected by Pray and Nagarajan (2013). The empirical analysis utilizes a Random Effects General Least Squares regression for two models with two variations with different dependent variables: R&D expenditure and R&D intensity. The results show that a firm's level of debt and external financing are positively related to R&D to start, supporting the notion that a firm's ability to acquire capital will affect its total R&D expenditure. However, debt is negatively related to R&D after a certain threshold is passed, supporting the concept of risk aversion among firms. In addition, the results supports previous literature which found that variables such as sales affect R&D positively. Finally, the results show that additional research is necessary to understand more fully the nature of cost in R&D investment. iv