The Impact of R&D Cooperations and Mergers in Pharmaceuticals on Research Activities and Drugs Offered on the Market

In the last 10 years, the pharmaceutical industry has experienced steep, unprecedented price increases which are frequently attributed to increasing drug development costs. To cope with rocketing development costs, companies engage in Research and Development (R&D) cooperations. We study the impact of R&D cooperations on firms' research activities and drugs offered on the market. Using a comprehensive dataset, we find that R&D cooperations formed at the early stage of the drug development process increase the number of R&D projects and the number of drugs offered on the market. Late stage R&D cooperations, formed among larger firms in technology and product markets, increase firms' research activities, but reduce the number of drugs launched on the product market. Results suggest that large firms cooperating in the late research stage re‐optimize their R&D pipelines and eliminate similarly aligned research projects.     

Cournot–Bertrand comparisons under R&D competition: Output versus R&D subsidies

We compare Cournot and Bertrand competitions with R&D investment under output versus R&D subsidy policies. We demonstrate that Cournot firms invest more (less) in R&D and the government grants more (less) subsidies than for Bertrand firms with output (R&D) subsidies. We also find that both competition modes yield the same welfare with output subsidy, while Bertrand yields higher welfare than Cournot with R&D subsidy. Finally, firms' profits and welfare in Cournot are higher under output subsidies, while they can be higher in Bertrand under R&D subsidies if the product substitutability is high and the firm's R&D investment is efficient.     

Local land supply and fiscal incentives for R&D: Evidence from a quasi-natural experiment in China

Whereas numerous studies have evaluated the effects of public research and development (R&D) support programs and R&D tax incentives on private R&D, little is known about local governments' fiscal incentives for R&D. In this study, we build a conceptual framework to clarify the critical role of local land supply in relation to fiscal expenditure on R&D. We treat the establishment of China's nine Land Supervision Bureaus in 2006 as a quasi-natural experiment, and run a difference-in-differences regression to identify causality. The results show that local governments allocate more fiscal expenditure to R&D in response to land-use supervision, which monitors illegal land granting behaviors, and this effect is stronger in cities where leaders have higher political career incentives and cities with greater fiscal decentralization. Moreover, we find that land-use supervision increases the probability and scale of firms' access to government subsidies for R&D; thus, enhancing regional innovation capacity. Our findings document that China's land resource is a curse for its innovation-driven growth as it impedes local governments' fiscal incentives for R&D.     

Process and product innovation: A differential game approach to product life cycle

We investigate the timing of adoption of product and process innovation using a differential game where firms may invest in both activities. We consider horizontal product innovation that reduces product substitutability, and process innovation that reduces marginal cost. First, we demonstrate that the incentive for cost‐reducing investment is relatively higher than the incentive to increase product differentiation. Second, depending on initial conditions: (i) firms activate both types of investment from the very outset to the steady state; (ii) firms initially invest in only one R&D activity and then reach the steady state either carrying out only this activity or carrying out both; or (iii) firms do not invest at all in either type of innovation. Comparing R&D investments under Cournot and Bertrand behavior shows that quantity competition entails lower R&D incentives than price competition in both directions.     

The Impact of R&D Intensity on Demand for Specialist Auditor Services*

The audit fee research literature argues that auditors' costs of developing brand name reputations, including top‐tier designation and recognition for industry specialization, are compensated through audit fee premiums. Audited firms reduce agency costs by engaging high‐quality auditors who monitor the levels and reporting of discretionary expenditures and accruals. In this study we examine whether specialist auditor choice is associated with a particular discretionary expenditure ‐ research and development (R&D). For a large sample of U.S. companies from a range of industries, we find strong evidence that R&D intensity is positively associated with firms' choices of auditors who specialize in auditing R&D contracts. Additionally, we find that R&D intensive firms tend to appoint top‐tier auditors. We use simultaneous equations to control for interrelationships between dependent variables in addition to single‐equation ordinary least squares (OLS) and logistic regression models. Our results are particularly strong in tests using samples of small firms whose auditor choice is not constrained by the need to appoint a top‐tier auditor to ensure the auditor's financial independence from the client.     

Optimal R&D Policy and Managerial Delegation Under Vertically Differentiated Duopoly

The paper investigates the optimal research and development (R&D) policy in a vertically differentiated market with managerial delegation. We consider not only discriminatory R&D policy but uniform R&D policy as well. It shows that R&D policy can vary depending on the regulator's objective: social welfare, consumer surplus or producer surplus; however, the outcomes are invariant to the nature of market competition. Undoubtedly, the relative‐performance contract plays a crucial role for elaborating policy effects. The government prefers discriminatory R&D policy to uniform policy under a consumer‐oriented objective. On the contrary, under a producer‐oriented objective, the government would prefer to choose uniform R&D policy rather than discriminatory policy.     

Linguistic Information Quality in Customers' Forward‐Looking Disclosures and Suppliers' Investment Decisions

This study examines whether and how linguistic information quality (measured by readability) of customer firms' management earnings forecast reports (MEFRs) affects supplier firms' investment quality (measured by investment efficiency). Our analyses reveal that supplier investment efficiency is positively associated with the average linguistic information quality of customers' prior MEFRs, and the positive association between supplier investment efficiency and customer MEFRs' numerical information quality is stronger in supplier firms with more readable customer MEFRs. Our analyses also reveal that higher linguistic information quality of customer MEFRs improves the monitoring of supplier firms by their outside stakeholders, such as institutional investors and financial analysts, and ameliorates the negative impact of suppliers' customer‐dependence on their investment efficiency. Our results suggest that greater linguistic information quality of a customer firm's forward‐looking disclosures is associated with higher‐quality investments made by its suppliers along the supply chain.     

To make or to buy from a common supplier? Strategic considerations and welfare consequences

Consider two downstream firms that each can either produce an input in-house or purchase it from an upstream supplier. We show that depending on the difference between the supplier's and the downstream firms' in-house production costs, outsourcing by both firms could help them achieve a Pareto improvement or leave them trapped in a prisoner's dilemma. Furthermore, we find that two downstream firms may play a chicken game in which each makes a sourcing decision different from its rival if the input supplier is not as efficient as in the previous cases. The welfare implications of various sourcing outcomes are explored.     

JIT Adoption: The Effects of LIFO Reserves and Financial Reporting and Tax Incentives*

Using matched samples of JIT adopters and nonadopters, we examine the association of JIT adoption with firms' financial reporting and tax incentives, earnings‐management histories, and LIFO reserve levels. We find evidence that adoption decisions are influenced by the interaction of firms' LIFO reserves with their income smoothing, debt covenant, and tax incentives. We also find that adoption is less likely for firms historically engaging in high degrees of earnings management, particularly when such firms have no substantial LIFO reserves. Our study extends earlier research demonstrating a relation between inventory valuation method and year‐end inventory transactions, and documents a relation between earnings‐management incentives and a fundamental supply‐chain design choice.     

Do R&D tax incentives work? Firm-level evidence from China

Tax incentives have been used worldwide to encourage firm R&D, but there is little evidence on their effectiveness as a policy tool in developing countries. We use a panel dataset of Chinese listed companies covering 2007 to 2013 to assess the effects of tax incentives on firm R&D expenditures and analyze how institutional conditions shape these effects. Our results show that tax incentives motivate R&D expenditures for our sample firms. A 10% reduction in R&D user costs leads firms to increase R&D expenditures by 3.97% in the short run. We also find considerable effect heterogeneity: Tax incentives significantly stimulate R&D in private firms but have little influence on state-owned enterprises' R&D expenditures. Moreover, the effects of tax incentives are more pronounced for private firms without political connections. Hence, reducing political intervention complements tax incentives' capacity to foster firm R&D in developing countries.     

Pharmaceutical Patents: Incentives for Research and Development or Marketing?

We analyze how a patent‐holding pharmaceutical firm may strategically use advertising of existing drugs to affect research and development (R&D) investments in new (differentiated) drugs, and thereby affect the probability distribution of future market structures in the industry. Within a fairly general model framework, we derive exact conditions for advertising and R&D being substitute strategies for the incumbent firm and show that it may overinvest in advertising to reduce the incentive for an entrant to invest in R&D, thereby reducing the probability of a new product on the market. In a more specific setting of informative advertising, we show that such overinvestment incentives are always present and that more generous patent protection implies that a larger share of the patent rent is spent on marketing, relative to R&D.     

Innovation and Corporate Tax Planning: The Distinct Effects of Patents and R&D*

Using a large US sample, we find a significant and positive relation between patents and corporate tax planning, and the effect is incremental to the effect of R&D on tax planning. We employ a quasi‐natural experiment based on staggered industry‐level innovation shocks to identify the positive causal effect of patents on corporate tax planning. We also find that patents are not associated with tax planning for domestic firms, but their association with tax planning is concentrated in multinational firms, which have the ability to shift domestic income to low‐tax countries. Moreover, we find that the identified effect mainly exists in the post–check‐the‐box (CTB) rule period when shifting income among affiliates becomes more flexible and convenient. Finally, we use two income‐shifting models and find that patents, rather than R&D, facilitate tax planning through an income‐shifting channel. Overall, our results suggest that R&D and patents facilitate firms' tax planning in distinct ways: R&D facilitates tax planning as intended through tax credits and deductions, whereas patents are used by taxpayers to avoid taxes aggressively through income shifting.     

R&D,financing constraints and export green-sophistication in China

This paper provides a theoretical and empirical analysis of the effects of R&D and financing constraints on the green-sophistication of Chinese firm exports. The theoretical model predicts that firms' R&D expenditure improves the level of green sophistication and financing constraints have moderating effects on firms' the export green-sophistication. The paper constructs an index of the export green-sophistication by incorporating green coefficient in traditional export sophistication. We use the data from the China industrial firm database and confirm our theoretical predictions. The financing constraints are found to have a significant moderating effects on the relationship between R&D and export green-sophistication in basic test and robustness check.     

R&D Collaboration Networks in Mixed Oligopoly

We develop a model of endogenous network formation in order to examine the incentives for R&D collaboration in a mixed oligopoly. Our analysis reveals that the complete network, where each firm collaborates with all others, is uniquely stable. When R&D subsidies are not available, in addition to the complete network, the private partial and the private‐hub star networks are Pareto efficient. However, the complete network becomes the unique Pareto efficient network when R&D is subsidized. This result is in contrast with earlier contributions in private oligopoly where under strong market rivalry a conflict between stable and efficient networks is likely to occur. It also highlights the role of a public firm as policy instrument in aligning individual incentives for collaboration with the objective of efficiency, independently of whether R&D subsidies are provided by the regulator.     

Going out to innovate more at home: Impacts of outward direct investments on Chinese firms' domestic innovation performance

This study explores the effects of cross-border mergers & acquisitions (CBMA) on domestic innovation of Chinese firms. We build a new panel dataset that matches information on CBMA and innovation activities for China's publicly listed firms. We rely on matching techniques combined with a difference-in-differences estimator to study the causal effects of CBMA respectively on firms' investments in innovation, innovation outputs, and financial performance. The main findings reveal that CBMA has both a positive impact on firms' R&D spending and number of patent applications, no statistically significant effect on the number of granted patents or on the quality of those patents, and a negative effect on firms' financial performance. These results depend, however, on the type of CBMA (horizontal or vertical), destination country (OECD or non-OECD), and the technological intensity (high-tech or not) of the acquirer and target firm. Overall, the findings bring into question whether CBMAs, and China's going-out strategy, will significantly boost its indigenous innovation capabilities.     

Endogenous transportation technology in a Cournot differential game with intraindustry trade

We investigate a dynamic Cournot duopoly with intraindustry trade, where firms invest in R&D to reduce the level of iceberg transportation costs. We adopt both open-loop and closed-loop equilibrium concepts, showing that a unique (saddle point) steady state exists in both cases. In the open-loop model, optimal investments and the resulting efficiency of transportation technology are independent of the relative size of the two countries. On the contrary, in the closed-loop case firms’ R&D incentives are driven by the relative size of the two countries. Policy implications are also evaluated.     

Technological Capability and FDI in Asia: Firm‐level Relationships among Japanese Manufacturers*

The present paper reexamines the relationship between technological capabilities and FDI decisions at the firm level. The data cover 118 300 Japanese firms in all manufacturing industries. The R&D of Japanese firms has a noticeably weaker relationship with FDI in Asia than with FDI in industrial countries. This finding is confirmed to be robust even when alternative estimation techniques are used and when R&D expenditure data are replaced by patent data. The estimation results also reveal non‐negligible fixed entry costs for FDI, a finding consistent with the observation that only approximately 2 percent of the firms invest abroad.     

STOCK MARKET VALUATIONS OF R&D AND ELECTRONICS FIRMS DURING TAIWAN'S RECENT ECONOMIC TRANSITION

The objective of the present study is to investigate the market valuation of Research and Development (R&D) investments in the Taiwanese stock market from July 1988 to June 2002. The motivation stems from Taiwan's recent economic transition from a labor‐intensive, then to a capital‐intensive, and currently to a technology‐based economy. The results support not only the existence, but also the persistence of R&D‐associated mispricing. More importantly, it has become stronger as the electronics industry gradually dominates the economy. First, R&D‐intensive stocks tend to outperform stocks with little or no R&D. Second, the R&D‐intensity effect cannot fully be attributed to firm size. Third, the R&D‐intensity effect is more pronounced for firms in the electronics industry after 1996.     

Why Do Large Firms' Prices Anticipate Earnings Earlier than Small Firms' Prices?*

This paper presents evidence that the positive association between firm size and price leads of earnings is not solely a function of private search incentives for firm‐specific information. Specifically, we find that small‐firm prices also lag large‐firm prices with respect to industry‐wide information. Our empirical analysis extends Collins, Kothari, and Rayburn 1987 and Freeman 1987, who document that security‐price leads of earnings are positively associated with market capitalization. In particular, we examine the association between firm size and the timing of security returns for two components of annual earnings changes: the average change for a firm's industry and the firm's idiosyncratic change. We find that large firms' prices have a longer lead than small firms' prices with respect to both components. Large firms' early lead on industry‐wide earnings suggests that returns of large firms predict returns of same‐industry small firms. To test this implication, we construct a portfolio of long (short) positions in small firms when the prior month's returns of large firms in their industry are above (below) average for large firms in other industries. This zero investment portfolio earns 4.5 percent over 12 months.     

A Cross‐national Comparison of R&D Expenditure Decisions: Tax Incentives and Financial Constraints*

We provide evidence on the impact of tax incentives and financial constraints on corporate R&D expenditure decisions. We contribute to extant research by comparing R&D expenditures in the United States and Canada, thereby exploiting the differences in the two countries' R&D tax credit mechanisms and generally accepted accounting principles. The two tax incentive mechanism designs are consistent with differing views of the degree of financial constraints faced by firms in these economies. Our sample also allows us to explore the effects of capitalizing R&D on Canadian firms. Employing a matched design, we document relations between tax credit incentives and R&D spending consistent with both Canadian and U.S. public companies responding as though they are not financially constrained. We estimate that the Canadian credit system induces, on average, $1.30 of additional R&D spending per dollar of taxes forgone while the U.S. system induces, on average, $2.96 of additional spending. We also find that firms that capitalize R&D costs in Canada spend, on average, 18 percent more on R&D. Collectively, this evidence is important to the ongoing debates in both countries concerning the appropriate design of incentives for R&D and is consistent with the assumptions found in the U.S. tax credit system, but not those found in the Canadian system.