This paper is a contribution to the small but growing literature that compares the
investment and R&D behavior of manufacturing firms in large developed countries that
have varying financial and capital market institutions. Specifically, we look at
two similar samples of French and United States firms during the period 1982-1993.
We estimate a dynamic specification of a simple error-corrected investment model
for both ordinary investment and for R&D investment, a model that incorporates both
output (sales or turnover) and cash flow as predictors for investment. Our focus
is on two comparisons: France versus United States and physical investment versus
R&D investment. In general, we do not find any significant differences between the
two countries in the long run effects of demand (output) on investment. However,
we do find that cash flow or profits appear to have a much larger impact on both
R&D and investment in the U.S. Except for the well-known difference in the serial
correlation of the two types of capital spending, we reject any significant differences
between investment and R&D behavior for each country; the major differences are between
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