Abstract
The investment opportunity set of a firm (IOS) reflects prospective growth opportunities and associated payoff distributions related to physical and human capital investments. IOS are largely firm specific, embedded into assets-in-place, or generated by experience curves, learning-by-doing or other similar phenomena. However, the value of the IOS can be destroyed if a firm does not exercise the option to invest. In this study, we theorize that a firm’s ability to invest in R&D is conditional upon the availability of favorable IOS. We test our theoretical propositions in European business environment with concentrated ownership using a sample of 832 publicly traded firms over the period of 2002-2011. Our findings support the notion that the IOS is a significant determinant of corporate R&D investments, however the magnitude of this effect depends on the identity of the ultimate owner. Family- and state-owned corporations have higher sensitivity of R&D investments to the IOS than widely held corporations do, suggesting that they are more responsive to the IOS than others are. These results prove a more fine-grained understanding of corporate R&D investment decisions and advance the innovation literature by introducing the dimension of IOS. Main theoretical and practical implications of these findings are provided.