Suppliers Dynamic Approach to Invest in R&D with Sunk Costs in Indian Contexts

Abstract

In this paper we test for the presence of sunk costs in suppliers’ R&D activities by analyzing the persistence of these activities using supplier level panel data. We develop and estimate a dynamic discrete choice model where each supplier’s current R&D expenditure is a function, among other factors, of its previous experience in performing R&D activities. The data used is a panel data of Indian suppliers, for the period 2003 - 2013. We find that prior R&D experience significantly affects the current decision to invest in R&D, and that, although important, the effect of prior R&D experience depreciates fairly quickly over time.

Keywords

• R&D Decision
• Persistence
• Sunk Costs
• Panel Data
• Multivariate Dynamic Binary Choice Model