Traditional and R&D Investments: Are They Really Different?

The aim of the paper is to identify the different role of financial funds in R&D and physical investments in the Italian firms. The data set used for this study is the Survey of Italian Firms conducted by the SME Observatory run by the Capitalia Research Division. R&D is defined as a creative activity implemented to improve knowledge and its use in new applications. Given its intrinsic characteristics, R&D is usually characterized by high information opacity that, coherently with the theory of asymmetric information, implies more difficulties to find external financial funds. The highest risk to R&D projects could be some forms of financial constraints. However, signalling mechanisms like as self-financing could correct such a market imperfection. The aim of the research is to investigate the determinants of R&D investments financial funds, and the use of internal capital compared to the financial funds. Using different econometric models (Logit, OLS and SUR) we identify significant effects of firm structure on funding decisions. Traditional and R&D investments are simultaneously considered to capture a possible interaction among different self-financing patterns. Our results show how information and agency costs, reflected in the firm characteristics, affect financing decisions in the case of R&D or physical investment. Our findings are consistent with the hypothesis that, in information opaque firms, internal equity plays an important role in R&D financing decisions. On the opposite, physical investments are less related to self-financing. The overall evidence indicates that banking variables are more relevant to physical investment as well.