R&D, Credit Constraints, and Demand Fluctuations: Comparative Micro Evidence from Ten New EU Members

The opportunity-cost approach, suggesting a countervailing cyclical effect between research and development (R&D) and short-term investments, is the subject of theoretical and empirical debate. Our contribution provides comparative firm-level evidence for the effect of demand fluctuations and credit constraints on firms' R&D. We use microdata from ten new EU member states drawn from the Business Environment and Enterprise Performance Survey conducted by the European Bank for Research and Development and the World Bank. The results indicate that, first, R&D is countercyclical, with more R&D gained in recession than is lost in booms and, second, countries with higher income levels have less countercyclical R&D. The expected-return effect gains importance over the opportunity-cost effect in countries with higher income levels.