Short note on Gross Capital Formation and R&D Expediture

Companies often consider the cost of R&D projects (especially salaries paid to R&D personnel) as part of their current expenses. Companies continue to do this practice even without exactly specifying what they mean by R&D project costs. This practice is misleading because spending on research is undeniably a form of fixed capital investment, even more so than the item that economists consider as the epitome of fixed capital investment âEUR" purchase of machinery. The dynamics of the possible relationship between investment in research and investment in machinery is that during times of economic expansion, firms tend to increase their investment in research to come up with product innovations capable of exploiting increasing effectual demand. Over time, this investment results in the emergence of the direct relationship between expense on industrial R&D and the business cycle. We tested this hypothesis both in Italy and in the USA. Our experiments are based on OECD statistics, referring to R&D spending from 1987 to 1999, and on the magnitude |Gross Capital Formation| in the manufacturing industry. We chose to represent our conjecture about a causal relationship between investment cycle and R&D expenditure econometrically.