Corporate financing, competition and spending on research & development

Research literature (see a few references in the Appendix) highlights: The distinctive features of spending on research & development; R&D requires a long time to generate revenues; the probability of failure is high; there is a marked information asymmetry: company executives have far better knowledge than external lenders of the probability of R&D success; R&D should then be financed not by debt (the time horizon of debt lenders is too short, the uncertainty and the inform ation asymmetry are too great ) but by self-financing and share s ; moreover, companies active in R&D must hold a lot of cash to be able to continue to finance R&D if it becomes difficult to access financial markets; Lastly, fierce competition is normally positive for R&D: competition reduces profit margins on existing products and therefore drives innovation to regain higher margins on new products. A comparison of OECD countries shows that to stimulate innovation, there is a need for: A large share market; Strong competition in the goods market. We also see that strong innovation stimulates productivity.