Corporate diversification and R&D intensity dynamics

We study the dynamic bidirectional relationship between firm R&D intensity and corporate diversification, using longitudinal data of Spanish manufacturing companies. Our empirical approach takes into account the censored nature of the dependent variables and the existence of firm-specific unobserved heterogeneity. Whereas we find a positive linear effect of R&D intensity on related diversification, the evidence about the effect of related diversification on R&D intensity takes the form of an inverted U. Hence, the effect of related diversification on R&D intensity is positive but marginally decreasing for moderate levels of related diversification, but such effect can turn out negative for high levels of related diversification. Additionally, the consequences of the dynamic relation are that the effects are substantially larger in the long-run than in the short-run.