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Previous research has shown inconsistent results pertaining to the relationship between capital investment in property, plant and equity and research and development spending (R&D). This study re-examines that relationship between capital investment and R&D in a panel of 36 pharmaceutical firms. This study uses short- and long-run causality methods to capture the connection between the two variables. The short-run causality evidence confirms the research by Mairesse and Siu (1984) documenting that capital investment does not Granger-cause R&D and vice versa. On the other hand, the long-run causality test suggest that R&D and capital investment are cointegrated and the causality runs in both directions. These results imply that capital investment depends on the success of the R&D effort over time. The implementation of breakthroughs created by R&D may require additional capital investment, e.g. facilities and equipment. Moreover, thriving investment activity in one period may stimulate R&D efforts the next period, in order to extend the success of the current products.
