The cost of capital, finance and high-tech investment

ISSN： 1465-3486

Source： International Review of Applied Economics, Vol.22, Iss.6, 2008-11, pp. : 693-705

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Abstract

Investment is the most volatile component of aggregate demand and it is often considered central to business cycles fluctuations. The responsiveness of business investment to changes in its price is thus crucial to our understanding of economic activity. In spite of the key role played by the user cost of capital in economic analysis, there is little empirical support for the existence of substantial user cost elasticity. However, most of the evidence to date is based on aggregate user cost data, which may have introduced downward biases in the estimated user cost. This paper contributes to the literature by constructing a disaggregated, industry-specific micro user cost variable and focusing on a special class of firms - the high-tech firms. To provide a benchmark for the results, the user cost estimates for the high-tech sector are compared with those for the rest of the manufacturing sector. The results suggest that there is little response of investment to variations in its user cost. The findings also suggest that high-tech firms' investment behavior is not, after all, that different from the rest of the manufacturing sector.