small-business-economics

R&D Profitability: the role of risk and Knightian uncertainty

Author: Pietro Moncada-Paternò-Castello

Date: 25 July 2016

Type: Other

Topic: Innovation

INTRODUCTION:


Companies facing risky, dynamic and uncertain environments often have to make difficult decisions regarding investments in physical capital and research and development (R&D). Some authors hypothesize the necessity of a “risk premium” when making decisions, whereby decision makers require higher returns for more risk. Others lament the ambiguity and unpredictability of innovation and its harmful effects on earnings. Sara Amoroso, Pietro Moncada Paterno’ Castello and Antonio Vezzani investigated these claims, correlating variables like risk, aversion and both country-level and firm-level ambiguity. By empirically analyzing the impacts of uncertainty on both profits and R&D returns, the article addresses the following questions:


How does a risk-bearing or mispricing rationale contribute to our understanding of the impact of risk on R&D returns?
Does the routinized behavior of firms help or harm their profit margins? How does ambiguity affect the degree of innovation and investment in R&D?
When controlling for risk and ambiguity, how are profit and R&D returns affected?

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