Abstract

Emiliano Chávez* and Carlos Jean González

The aim of this paper is to investigate the issue of R&D investment and the market value of firms. This idea dates back from Arrow paper, later developed by Paul Romer, but in the area of economic growth. Zvi Griliches in 1979 first introduced the production function, which was later used in a vast literature from this area. In the theoretical section of this paper, Tobin’s original model and Abel’s (1984) model were described. These models relate Tobin’s quotient with intangible assets of the company. In the empirical part, crosssection time series model (Feasible Generalized Least Squares Model) was developed for a panel (a total of 11 panels) of countries in Europe including UK and Turkey. Later, we test that model by estimating the marginal effects of R&D investment with Tobin’s q on a small economy such as R. Macedonia. The results exert positive and statistically significant relationship between market value of the firms and R&D investment.