The Effect of Product Demand Decline on Investments in Innovations: Evidence from the U.S. Defense Industry

摘要

The end of the Cold War led to a substantial decline in defense product demand. This study investigates the effects of product demand decline on defense firms’ investments in Ru26D for innovations. Our evidence indicates significant lower levels of Ru26D intensity for the low demand period (1993 to 1998) than for the high demand period (1984 to 1989). We also find significant declines in the defense firmsu27 return on assets over the period, which is mainly attributable to a significant decrease in the firmsu27 efficiency of using assets to produce sales. The defense firms, despite decline in defense product sales, generally maintained their total sales by partially shifting their capacity to commercial markets, which might be at the sacrifice of profitability, operating efficiency, and Ru26D investments for innovations.