Composition of R&D expenditures and firm performance

ABSTRACT

The explosion of research and development (R&D) expenditures in China brings a puzzling fact that the proportion of research in R&D is extremely small, and thus the proportion of development is large. This article distinguishes research from development in R&D and investigates the heterogeneous effects of the two components on the performance of Chinese listed firms. Using a generalized propensity score matching approach with continuous treatments, we present non-linear relationships between R&D composition and firm performance. While development-oriented firms benefit more from an increase in profit than a growth in productivity, orientation toward research contributes more to productivity gains than to profitability. Research and development activities are found to be complementary in promoting firm performance. The results suggest the existence of optimal proportions of the components of R&D for maximizing firm performance.     

R&D subsidies in a model of growth with dynamic market structure

This paper presents the effects of an R&D subsidy in a Schumpeterian general equilibrium model with rich industry dynamics. R&D subsidies raise the long-run growth rate, but they also raise the level of industry concentration. In the model firms compete for market share through process R&D endogenously determining the market structure within and across industries. Endogeneity of the market structure allows for analysis of changes in the moments of the firm size distribution in response to policy. R&D subsidies primarily benefit large incumbent firms who increase their innovation rates creating a greater technological barrier to entry. Concentration increases with fewer firms and a higher variance in the market shares. In general equilibrium, the greater distortions in the product market cause the wage rate to fall which leads to increased turnover rates. In addition, the analysis demonstrates that the model captures a large number of empirical regularities described in the industrial organization literature, but absent from most endogenous growth models. These features, such as entering firms are small relative to incumbents, the hazard rate of exit is negatively related to firm size, and large firms spend more on R&D than small firms play important roles in understanding the impact of R&D subsidies on the economy.     

Disciplining firms: the impact of trade reforms on profit margins in Indian industry

The paper analyses the effects of increased trade exposure on the profitability of firms in Indian industry. While trade reforms are often expected to decrease profit margins as firms struggle to compete in international markets, there is the possibility that increased competition may improve firm efficiency and provide a positive impetus to firm profitability. This paper is different from many others in this area in that it considers both these possibilities. An efficiency index is created to directly analyse the impact of changing efficiency levels on firm profit margins. Results indicate that liberalization significantly influenced profit margins. However, its main effect is through the impact that it has had on other firm variables - market shares, advertising, R&D and exports - all of which changed after 1991. While exports have had a pro-competitive effect on profit margins in the selected sample, AD and R&D both cause an increase in profit margins. It is also found that neither capital nor managerial capabilities (as proxied by remuneration) are particularly effective in increasing profit margins.     

Research and development and labour productivity: do high-tech firms exhibit labour- or capital-saving technical change?

Employment and output in the advanced technology sectors have generally exhibited above-average growth for more than two decades. While this industry accounts for a relatively small share of total employment, the majority of private sector research and development (R&D) expenditures in the US is concentrated within seven sub-sectors. However, little attention has been paid as to whether high-tech productivity exhibits Hicksian capital or labour ‘savings’ bias or tendency to displace either factor input over time. Biased technical change can occur as economies transition between growth regimes. An augmented production function is employed to analyse the additional impact of R&D activity on firm-level labour productivity. A panel data set comprised of high-tech firms located across the advanced economies, China and India from 1990 to 2013 is used in the analysis. Labour-saving technical change was present across the advanced technology sectors and most countries. The expanded models of labour productivity that used fixed effects with lagged regressors confirmed the prior results as well as finding that R&D per employee, relative R&D intensity and firm market share contribute to firm-level labour productivity growth across countries and sectors. Additional support was found for diminishing returns to scale but not for R&D spillover effects.     

What are good R&D investment strategies for leaders and followers?

Research and development (R&D) investment affects the growth of firms in the same industry differently according to their technological positions. This study empirically investigates differences in how R&D investment influences firm growth between technological leaders and followers. Additionally, this study investigates the moderating effects of complementary assets and market competition on the relationship between R&D investment and firm growth. Using a sample of 2322 observations from 492 firms in the U.S. chemical and allied products industry for the period 2000–2009, we show that an increase in R&D investment leads to greater firm growth for technological followers than for technological leaders. We also find that the moderating effects of complementary assets and market competition vary depending on whether a firm is a technological leader or follower.     

Value maximizing hurdle rates for R&D investment

We show that the value maximizing hurdle rate for research and development (R&D) investments among private firms operating in a market setting is less than for conventional investments despite the fact that R&D has development risk. Because development risk arises only during R&D, entrepreneurs control this risk by deferring or pursuing R&D depending upon profitability. This risk management moderates downside loss and encourages upside gain which increases the value attraction of R&D and decreases the value maximizing hurdle rate below that of conventional investment.     

Demand Shift Effect of R&;D and the R&;D Organization

We assume that R&D investment by a firm improves the quality of the product. This is reflected in an upward shift of the demand function. Firms can do R&D either independently or cooperatively. We show that cooperative research strictly dominates non-cooperative research, both in terms of profitability and welfare. Also, R&D investment by each firm under cooperative research is larger for a relatively high R&D output elasticity. The higher the degree of product differentiation and/or larger the R&D output elasticity is, the larger the increase in quality level under cooperative research, compared to non-cooperative research, will be.     

Firm performance and corporate finance in New Zealand

Low productivity growth in New Zealand has been a paradox. We study New Zealand firms’ profitability, in terms of profit margin and return on assets (ROA), from the viewpoints of productivity enablers using firm-level panel data. We find that tangible fixed investment and a research and development (R&D) tax incentive are associated with higher profitability performance. In addition, the firm size is found to be a key determinant of profit margin. By contrast, we do not find any evidence that intangible investment can improve the profitability. The global financial crisis has not changed the leverage effect on ROA in New Zealand, while the impact of R&D became more prominent after the crisis.     

R&D investment and internal finance: the cash flow effect

This paper investigates the cash flow effect on R&D investments for firms in Denmark. Evidence is found that internal funds are important in explaining R&D investments, indicating that R&D investment decisions are affected by credit market imperfections. Cash flow sensitivities are larger both for smaller firms and for firms with low debt relative to assets. Furthermore, this effect is also present after controlling for cash flow’s potential role as a predictor of future profitability.     

A simple theory and evidence on the determinants of firm R&D

This paper derives a simple, but informative, model of firm R&D to figure out key factors that determine firm R&D effort. The model suggests a demand-pull, technology-push theory of R&D by showing that a firm's profit-maximizing R&D expenditure is determined jointly by both demand-side factors and technology-side factors. The former includes demand size (firm sales) and consumer preference over quality and price and the latter includes R&D cost structure or the production-cost effect of product R&D and firm-specific technological competence. In addition, the model shows that other things being equal, the stock of exogenous technological knowledge, including the firm's previously accumulated technological knowledge, relevant to current R&D which is negatively related with current R&D effort. An empirical analysis of firm R&D intensities and technological capabilities of more than 1600 firms in nine industries across six countries provides supportive evidence for the theory. Further, the theory implies that R&D intensity or the R&D-to-sales ratio is independent of firm size unless firm size affects technological competence and that given consumer preference and R&D cost structure facing all firms in the same industry, the distribution of firm-specific technological competence among firms determines the distribution of firm R&D intensities within the industry.     

A comparative analysis of the change in R&D efficiency: a case of R&D leaders in the technology industry

This paper measures the cumulative change in research and development (R&D) efficiency of globally leading R&D companies in the technology industry. We use Data Envelopment Analysis /Malmquist index to analyse 49 such companies. The change in R&D efficiency is analysed by decomposing the Malmquist index into ‘catch-up’ and ‘frontier shift’ indices, and by comparing cumulative indices to those at the starting period. Those cumulative indices are obtained at both a firm and an industry level. Results indicate that the overall R&D efficiency of these globally leading R&D companies declined slightly during the period 2007–2013. At a firm level, this study determines in detail how the trend of each firm in R&D activities differs from other companies.     

Research Joint Ventures with Asymmetric Spillovers and Symmetric Contributions

The paper proposes a new type of R&D cooperation between firms endowed with asymmetric spillovers, which we call symmetric Research Joint Venture (RJV) cartelization, based on reciprocity in information exchange. In this setting, firms coordinate their R&D expenditures and also share information, but such that the asymmetric spillover rates are increased through cooperation by equal amounts. It is found that this type of cooperation reduces R&D investment by the low spillover firm when its spillover is sufficiently low and the spillover of its competitor is sufficiently high. But it always increases the R&D of the high spillover firm, as well as total R&D (and hence effective cost reduction and welfare). A firm prefers no cooperation to symmetric RJV cartelization if its spillover rate is very high and the spillover rate of its competitor is intermediate. The profitability of symmetric RJV cartelization relative to other modes of cooperation is analyzed. It is found that symmetric RJV cartelization constitutes an equilibrium for a very wide range of spillovers, namely, when asymmetries between spillovers are not too large. As these asymmetries increase, the equilibrium goes from symmetric RJV cartelization, to RJV cartelization, to R&D competition, to R&D cartelization.     

Innovation and productivity in manufacturing and service firms in Catalonia: a regional approach

This article analyses the determinants of research and development (R&D) and the role of innovation on labour productivity in Catalan firms. Our empirical analysis found a considerable heterogeneity in firm performances between the manufacturing and service industries and between low- and high-tech industries. The frontiers that separate manufacturing and service industries are increasingly blurred. In Catalonia high-tech knowledge-intensive services (KIS) play a strategic role in promoting innovation in both manufacturing and service industries, and driving growth throughout the regional economy. Empirical results show new firms created during the period 2002–2004 that have a greater R&D intensity than incumbent firms (54.1% in high-tech manufacturing industries and 68.8% in high-tech KIS). Small and young firms in the high-tech KIS sector are very prone to carrying out R&D and they invest more in innovation projects. R&D expenditures, output innovation, investment in physical capital, market share and export have positive effects on labour productivity in both the manufacturing and service sectors. Firm size, on the other hand, has a positive effect on productivity in manufacturing industries but not in services.     

R&D competition, absorptive capacity, and market shares

This paper deals with an oligopolistic industry where firms are engaged in cost-reducting R&D activity to maximize their market shares. The existence and uniqueness of a feedback-Nash-optimal R&D strategy for each firm are discussed. Our simulations highlight that variations in spillovers hardly influence the firms' R&D investment, if their absorptive capacities to exploit extramural knowledge depend on their R&D efforts. Moreover, extramural knowledge cannot completely replace in-house R&D. However, a high level of public R&D favors the firm with the most restrictive R&D expenditure constraint and/or with the lowest initial R&D stock, provided it invests in R&D.     

Gradual Product Replacement,Intangible-Asset Prices and Schumpeterian Growth

The paper develops a general-equilibrium model of scale-invariant Schumpeterian (R&D-based) growth. New higher-quality products are discovered through stochastic and sequential R&D races in each industry. The market share of an R&D race winner increases gradually and is governed by an exponential deterministic process. The introduction of gradual (as opposed to instantaneous) product replacement sheds more light on the effects of the rate of technology diffusion on long-run growth and on long-run dynamics of intangible asset prices. An economy with faster product diffusion rates experiences higher long-run innovation rates, faster transitional growth, and is populated by younger firms. As the typical firm becomes older, the earnings yield (i.e., the inverse of the price earnings (P/E) ratio) increases and expected earnings growth declines. Younger firms have lower earnings, lower market shares, but higher P/E ratios and higher expected earnings growth associated with their higher potential market growth.An electronic version of the paper is available at http://bear.cba.ufl.edu/dinopoulos/research.html.     

Industry R&D intensity distributions: regularities and underlying determinants

This paper aims to examine the nature of the distributions of firm R&D intensities within industries and explore the factors that underlie the industry R&D intensity distributions. In particular, following the seminal study by Cohen and Klepper (1992) and using some new and rich data on firm R&D intensities for seven industries across six countries, this study examines the regularities in the industry R&D intensity distributions and demonstrates, based on a simple model of firm R&D, that the industry R&D intensity distributions are governed by the distributions of technological competence, a measure of firm R&D productivity, which corresponds to the notion of the “unobserved R&D-related capabilities” suggested by Cohen and Klepper (1992). This study found that firm R&D intensities within industries are lognormally distributed, displaying a strikingly regular pattern across industries, that the industry distributions of the levels of technological competence are also lognormal, and that, based on the formal model of firm R&D and the notion of the unobserved R&D-related capabilities, the distribution of firm technological competence within an industry underlies the industry's firm R&D intensity distribution.     

Business type,industry value chain,and R&D performance: Evidence from high-tech firms in an emerging market

This study focuses on how the business type and technological learning mode, which a high-tech firm chooses based on its core competence, influence the firm's R&D strategies, which in turn affect firm performance. This study also explores how the interaction between a firm's business type and industry value chain stage affects the relationship between R&D investments and operating performance. We suggest that the linkage of R&D investments and operating performance will increase gradually, when firms move from contract manufacturing to own brand business. R&D investments can contribute more to performance when firms adopt the hybrid business type. Furthermore, R&D investments generate more significant benefits for the own brand companies than the contract manufacturers at the same stage of the industry value chain. R&D investments of the downstream contract manufacturers have a negative impact on firm performance. Regardless of business type, firms in the upstream (midstream) stage of the industry value chain outperform downstream stage firms in deriving benefits from R&D activities. Finally, the lagged effects of R&D investments on operating performance are affected by the interaction between business type and industry value chain.     

Asymmetric firms,technology sharing and R&D investment

We use a combination of theory and experiment to study the incentives for firms to share knowledge when they engage in research and development (R&D) in an uncertain environment. We consider both symmetric and asymmetric starting points with regards to the amount of initial knowledge firms have before conducting R&D and look at how differences in starting positions affect the willingness of firms to share knowledge. We investigate when and if firms find R&D cooperation beneficial and how investment in R&D is affected by the outcome of the sharing decisions. The experimental evidence shows that overall subjects tend to behave consistently with theoretical predictions for the sharing of knowledge, although leaders who are not compensated by a side payment from laggards are more willing to share than predicted by the theory, and leaders who are compensated are less willing. The data on investment suggests less investment with sharing than without, consistent with theory. Compared to exact numerical predictions, there is overinvestment or underinvestment except for symmetric firms under no sharing. All cases of overinvestment and underinvestment, regardless of sharing or not and regardless of starting positions, are well explained by smoothed-out best (quantal) responses.     

Technology Strategy And Product Diversity

This paper considers a three-stage game of a differentiated oligopoly: firms first make their entry decisions, then they choose production technologies and in the third stage of the game they decide product prices. The technology choice can be understood as selecting one from a pool of those recently available as well as developing a new technology through innovative activities. The resulting market equilibrium is then compared with the social optimum. The main conclusions are that a monopolistically competitive market will typically undersupply both product variety and production scale. R&D competition in a free entry differentiated oligopoly will lead to insufficient R&D investment at firm and industry levels.     

How do different motives for R&D cooperation affect firm performance? – An analysis based on Swiss micro data

The starting point of our analysis is the empirical fact that firms pursue different goals when getting engaged in R&D collaborations, often more than one goal at the same time. Given that firms are driven by different motives for R&D cooperation, the aim of this article is to investigate the differences related to different motives with respect to the impact of R&D cooperation on firm innovativeness and firm productivity. Not only R&D cooperation in general but also cooperation driven by each of the seven motives considered in this paper correlate positively with the sales share of innovative products. With respect to innovativeness, the characterization of cooperation by the driving motive did not add much more than could be gained through the overall variable ‘R&D cooperation yes/no’. Technology-motivated collaborative activities show a weaker tendency to positive direct effects on productivity than cost-motivated cooperation. In this case, the distinction of several cooperation motives yields some additional insights as compared to the overall cooperation variable. On the whole, distinguishing various cooperation motives appears to be fruitful because it allows more differentiated insights that would remain hidden behind the overall variable “R&D cooperation yes/no”.