Reward-Timing Uncertainty and R&D Investment

One of the key features of research and development (R&D) is that the timing of investment reward is uncertain - you do not know when the reward will be materialized. We show that this reward-timing uncertainty raises R&D investment due to the convexity of decision makers’ time preferences. To capture such an effect, we measure people’s perceived reward-timing uncertainty using a special structure of languages, so called future-time reference (FTR), which refers to when and how languages mark the timing of events. Weak-FTR language speakers hold less precise beliefs on the timing of future events and perceive higher timing uncertainty. International evidence strongly supports the positive effect of reward-timing uncertainty on R&D at both the country and firm levels. On average, aggregate R&D of the business sector as a percentage of GDP and the firm R&D-to-Assets ratio for weak-FTR countries are respectively 0.18 and 0.6 percentage points higher than those for strong-FTR countries. Within-country analysis based on Belgium, in which both weak- and strong-FTR languages are used, and Difference-in-Differences tests based on Hong Kong, in which a weak-FTR language (Chinese) relative to a strong-FTR language (English) became increasingly important after 1997, further confirm our cross-country results.