Size and value effects in high-tech industries: The role of R&D investment

We use monthly US stock data over 55 years from 1962 to 2017 to show that the R&D intensity at firms adds another important dimension to the size and value effects in describing stock returns, especially for small high-tech firms. A trading strategy that double sorts on R&D intensity and size or book-to-market ratio outperforms a simple small-minus-big (SMB) or high-minus-low (HML) strategy in producing higher and more significant portfolio returns. The most profitable schemes involve triple sorts by size, BM, and R&D intensity: the payoffs of buying high-BM/R&D-Active portfolio and selling low-BM/R&D-Inactive portfolio in the small-size/high-tech group and that of buying high-tech/high-BM and selling low-tech/low-BM in the small-size/R&D-active group generate a return of more than 2% on a monthly basis. Our results are robust to alternative classification method of assigning stocks in portfolios.     

R&D strategy and Australian manufacturing industry: an empirical investigation of emphasis and effectivness

This research investigates the degree of emphasis placed by the Australian manufacturing industry on Research and Development (R&D) strategy as well as on other organisational strategies such as marketing, HRs (HR), technology, and operations at the functional level. The research extends further to investigate whether the emphasis on R&D strategy differs with contextual factors such as firm size, firm’s generic strategy, type of market, firm’s life cycle stage, etc. A mail survey was carried out to collect information from manufacturing firms across Australia. This was followed by an on-site interview of some of the senior managers of manufacturing firms from three Australian states: South Australia, Victoria and New South Wales.The study found that although the emphasis on R&D strategy has received a high priority in the past few years, it has not been as effective as the operations strategy and the technology strategy. The operations strategy has been accorded the highest importance in the past few years and this will continue in the future. The study also indicated that firms, which adopt a differentiation generic strategy, put more emphasis on R&D than the firms, which adopt cost leadership and focus generic strategies. The results did not indicate any evidence of a relationship between firm size and the R&D strategy although large firms are found to put more emphasis on operations and marketing strategies. Relatively higher emphasis was placed on the R&D strategy by businesses: at the growth stage; involved in the manufacture of consumer goods as opposed to industrial goods; involved in exports with a higher sales growth in export markets; and having a higher growth rate relative to their industry.     

Residual income claimancy,monitoring, and the R&D firm: Theory with application to biotechs

This paper models the assignment of residual income claimancy to an R&D manager and applies the model to biotechnology firms. Residual income claimancy provides incentives for the manager to monitor the R&D process. Since the nature of R&D and of monitoring scientific effort is different, our model predicts stark differences in the residual income claimancy of managers and in other aspects of organization for innovative R&D firms like biotechs. In particular, R&D firms are expected to be more owner‐managed, more expert‐managed, and smaller in size. Cross‐sectional data on biotechnology firms is consistent with these implications. Additionally, longitudinal data indicate that as firms alter their focus on biotech research, their organizational structure changes as expected. Our approach suggests a process of firm and industry evolution related to technological maturity and points to the importance of incentives rather than risk sharing in determining organizational form, similar to the original analysis of franchising. Copyright © 2004 John Wiley & Sons, Ltd.     

An analysis of firm-level innovation strategies in the US biotechnology industry

This study examines factors that may affect innovation strategies and performance of firms in the biotechnology industry. Specifically, differences between factors common to firms with high R&D intensity and those to firms with low R&D intensity are investigated. Biotechnology firms with relatively higher levels of R&D intensity attribute their innovation performance to research-based innovation factors and strategies such as strengthening their own research capabilities, entering into research collaborations with universities, industry leaders and other biotech firms, and licensing their technology. These strategies can be summarized as alignment within the industry. Firms with relatively lower R&D intensity have a hybrid focus—they invest in R&D but may also have products on the market. These firms attribute their innovation performance more so to production-based innovation factors and strategies such as gaining market access and maintaining connections with customers. Their strategy focuses on competitiveness, marketing, and distribution channels, while not ignoring the importance of a strong research base and the need to advance technologically. In a sense, strategies employed to achieve successful innovation reflect the stage of innovation in which a firm is operating for a particular product or process.     

Home market effects with endogenous costs of production

In a standard imperfect competition model, we endogenize the costs of production of firms in the increasing returns sector (IRS) via process R&D. We show that firms in the larger region in terms of demand invest more in R&D (i.e.: they are bigger in size and have lower marginal costs) than firms in the smaller region, since the former exploit larger economies of scale in production to pay for the costs of R&D. As a result, when the return on R&D is high, the larger region does not employ disproportionately more labor nor attracts a disproportionately larger share of firms in the IRS in relation to share of demand it hosts, i.e.: negative home market effects (HMEs) in employment and in the number of firms. When this occurs, only partial agglomeration of the IRS in the larger region is sustainable in equilibrium. Even so, the larger region always runs trade surplus in the IRS, i.e.: HME in trade patterns.     

Returns to research and development in the us pharmaceutical industry

Research concerning the pharmaceutical industry rate of return has concentrated on two policy issues: (1) possible resource misallocation and (2) the drug innovation environment. Accounting returns are suspect for policy purposes, requiring attention to the role of, and impact on, expectations of returns. This paper uses evidence about expectations and about resource flows into R&D consistent with those expectations to infer the level of economic returns. Our results provide evidence of a decline in expected returns, with exit of firms and resources. Regulation may be one of the major causes of the adverse shift in prospective returns from R&D investments.     

Competing Research Joint Ventures

Research and development (R&D) competition among firms has recently been extended to R&D competition involving research joint ventures. It was previously shown that in an industry conducting cost-reducing R&D followed by competition in the product market, if all firms both fully share R&D information and coordinate investments to maximize pint profits, final products prices are lower, and firms' profits are higher than with information shriving alone, joint profit maximization alone, or no cooperation. In this paper we question whether a single research joint venture (RJV) cartel is the best form of industry R&D coordination. We show that there are circumstances in which splitting a single RJV cartel into several competing ones yields lower product prices. Moreover, we show that in these circumstances, splitting the industry into exactly two competing RJV cartels would be best.     

Spillovers,absorptive capacity and agglomeration

I study knowledge spillovers in an industry where firms are heterogeneous in their ability to adopt knowledge (absorptive capacity). I set up a model in which firms choose locations anticipating potential gains and losses from other firms’ R&D activity. I apply the model to the US software industry and obtain the following results: the data supports localized knowledge spillovers; firms that have higher absorptive capacity are sorted into more agglomerated counties; ignoring firm heterogeneity leads to biased estimates of gains from spillovers; spillovers play an important role in explaining the geographic distribution of firms, but only within regions with high R&D activity.     

The role of executives in hostile takeover attempts

This paper proposes a two-stage game theoretic model where the discretionary power of executives acts as an implicit defense against hostile takeovers. Following managerial enterprise models, this paper analyzes the effects of discretionary power of target’s executives over R&D and advertising expenditures in defeating hostile takeover attempts. It is shown that in vertically differentiated industries, in equilibrium, target’s executives keep low level of R&D and advertising expenditures to make their firm an unattractive target for hostile takeovers. The model reveals that executives are influenced by their self-interest of monetary and non-monetary benefits and this self-interest makes the industry more differentiated.     

Cooperative R&D ventures: Strategic behavior versus transactional efficiency

This paper examines a sample of 48 cooperative R&D ventures announced in the period 1983–1990 to determine their impact on the stock price of the announcing firms. It finds that the venturing firms earn statistically significant positive abnormal returns over periods surrounding the announcement date. These gains are greater than those that result from announcements of increases in expenditures on in-house R&D. The cross-sectional analysis reveals that abnormal returns to the venturing firms are independent of industry concentration, larger in international ventures than in domestic ventures, and equal in cooperative agreements and equity joint ventures. These results support the transactional efficiency perspective of cooperative R&D ventures and suggest that the relaxation of antitrust laws as they apply to cooperative R&D ventures in 1984 is a welfare-improving policy.     

The differential effects of public R&D support on firm R&D: Theory and evidence from multi-country data

This paper aims to evaluate the effects of various forms of public research and development (R&D) support on firms’ incentives to invest in R&D. First, in order to identify potential channels through which public R&D support influences firm R&D, a formal model of firm R&D with public R&D support is developed and analyzed. Four potential channels are identified: the technological-competence-enhancing effect, the demand-creating effect, the R&D-cost-reducing effect and the (project) overlap (or duplication) effect. These multiple channels indicate that it is difficult to evaluate the aggregate effect of public R&D support and that there are differential effects of public R&D support on firm R&D, depending on various firm- or industry-specific characteristics. Second, the differential effects of public R&D support are empirically tested using unique firm-level data for nine industries across six countries. Public support tends to have a complementarity effect on private R&D for firms with low technological competence, for firms in industries with high technological opportunities and for firms facing intense market competition. In contrast, firms with high technological competence and firms that have enjoyed fast demand growth in recent years show a crowding-out effect, and firm size and age do not show any discernible differential effect.     

Managerial incentives and R&D investments: The moderating effect of the directors’ and officers’ liability insurance

Literature regarding the impact of managerial incentives on firm’s research and development (R&D) investments suggests that due to the riskiness of R&D activities, firms need to provide managerial incentives to encourage managerial discretion on corporate long-term investments of R&D. In spite that managerial incentives influence corporate R&D spending, some also argue corporate R&D spending a function of managerial incentive schemes. This paper applies the simultaneous equation to investigate the association between managerial discretion on R&D investments and the incentive scheme of CEO compensations by using the sample firms listed in Taiwan Security Exchange and Taipei Exchange. The results indicate that the listed firms in Taiwan simultaneously determine corporate R&D investments and CEO compensations. They reward their CEOs in compliance with their efforts on R&D investments and CEO compensation motivates CEOs to align their interests with firms’ long-term investments on R&D. A further analysis of the protection effect from the directors’ and officers’ (D&O) liability insurance suggests that D&O protection intensifies the relationship between R&D investments and CEO compensation. It encourages CEOs to allocate resources on R&D activities and make CEO incentive contracts efficacious on corporate long-term investments. The result is robust in the electronic industry of Taiwan.     

The relationship between the valuation effect of equity financing and firm-specific characteristics

The findings of this study indicate that although the overall announcement effect of equity offerings is negative on the issuing firms' common stock prices, 23 percent of the sample firms have a positive two-day announcement period stock abnormal return (CAR). Further tests show that firms in the positive CAR group have significantly higher research and development (R&D) and profitability than firms in the negative CAR group, while the average leverage ratio of firms in the positive CAR group are significantly lower. Results of the regression analysis suggest a positive relation between the price effect and R&D as well as the profitability ratio. It also is found that only in the sample of large R&D firms is the magnitude of R&D significantly associated with the magnitude of announcement effect.     

Industry influence on firms' R&D and innovation

This paper examines the effect of peers on a firm's research and development (R&D) policy. We show that firms do not make R&D decisions in isolation, and that industry dynamics play an important role in defining a firm's R&D intensity. Using a large sample of 54,393 firm-year observations from 1991 to 2015 in the United States, we find that firms' R&D decisions are mainly driven by their industry peers' R&D policies. Moreover, we find that R&D mimicking is significant only in the presence of strong product market competition, whereas we do not find any evidence of information-based herding in R&D investments. Our additional analysis shows that our main conclusions remain valid even in the presence of financial constraints, and regardless of the firms' market positions. Finally, we provide evidence that R&D mimicking increases firms' future values, future patent outputs, and estimated patent dollar values. Our findings are robust to endogeneity concerns, and to using alternative sample compositions, R&D intensity proxies, and different industry classifications.     

Is R&D spending influenced by disinvestment and local political corruption? The case of Indian central public sector enterprises

The current study examines the effect of disinvestment (dilution of state ownership) and local political corruption on R&D spending in enterprises owned by the central government of India. Based on certain characteristic features of innovation as a strategy available to state-owned enterprises, I build two sets of hypotheses formalising the channels of how these variables may affect the possibility and amount of R&D. Data is drawn from multiple sources to compile a dataset that covers all manufacturing central government-owned enterprises in India over a period of ten years from 2007 to 2016. The study employs an instrumental variable technique to reduce the endogeneity between disinvestment and R&D decisions. We find that, while disinvestment and local political corruption have strong negative effects on whether a firm invests in R&D or not, it has no effect on the amount of R&D. In fact, the amount is driven by a host of firm-specific factors such as size, profit and proficiency of the share of skilled labor, managerial strength and non-unionisation of labor. We also find that the effects are strongly driven by the size of firms, special status awarded to firms and the ideology of the state where the enterprise operates.     

The Welfare Effects of the National Cooperative Research Act (NCRA) of 1984 and the National Cooperative Production Amendments (NCPA) of 1993

A bstract .   Cooperative R&D and production joint ventures may enable firms to achieve significant cost efficiencies. However, they can also be a means of controlling industry output and raising product prices. A review of the literature on the welfare implications of allowing rival firms to cooperate in the R&D and production stages indicates that the issue is controversial from a theoretical perspective. There is need to examine the motivations of R&D and production joint ventures in order to assess the welfare implications of the National Cooperative Research Act (NCRA) of 1984 and National Cooperative Production Amendments (NCPA) of 1993, which relaxed the antitrust treatment of R&D and production joint ventures. Using samples of 127 cooperative R&D joint ventures and 342 cooperative production joint ventures announced by U.S. domestic firms during 1979–1999, this article finds that these endeavors do not meet the criteria for collusive behavior specified by the market power doctrine. We interpret these findings as suggesting that cooperative R&D and production joint ventures are motivated by cost efficiencies and are, therefore, welfare enhancing. Our results pose some challenges to the doctrine that antitrust actions by regulatory authorities are always welfare improving.     

Research collaboration and R&D outsourcing: Different R&D personnel requirements in SMEs

The literature on ‘open’ innovation emphasises the need to engage in external knowledge relations in order to innovate. Particularly for SMEs, research cooperation and R&D outsourcing can offer possibilities to complement the often limited internal research resources. However, they also bring in their wake requirements in terms of absorptive capacity and managerial skills of the internal R&D personnel.The paper focuses on the different requirements in terms of availability and training of research managers and R&D experts for research cooperation versus R&D outsourcing in SMEs. An empirical analysis of micro-level data provided by the OECD business R&D survey for Belgium reveals that the relation between R&D personnel requirements and research collaboration and R&D outsourcing depends upon the SME size. Therefore, to study this subject appropriately a distinction between very small, small, and medium-sized firms is relevant. Very small firms engage significantly less in research cooperation than medium-sized firms and the propensity to engage in research cooperation is positively associated with the share of PhD holders among the research managers and R&D experts. For R&D outsourcing a lower involvement is noted in medium-sized firms, and the propensity to outsource increases with the formal qualification level of the R&D personnel and with R&D training. Among the SME, small firms are most engaged in research cooperation and in R&D outsourcing. In the case of research cooperation they rely on highly qualified experts. For R&D outsourcing activities both the presence of research managers and R&D experts is important.     

The R&D Investment–Uncertainty Relationship: Do Strategic Rivalry and Firm Size Matter?

This paper uses a real options perspective to augment a standard research and development (R&D) investment model and implement a firm‐level empirical analysis to assess the practical significance of market uncertainty and its interactions with strategic rivalry and firm size. We use a measure of firm‐relevant market uncertainty along with panel data and find that firms invest less in current R&D as uncertainty about market returns increases. The effect of firm‐specific uncertainty on R&D investment is smaller in markets where strategic rivalry is likely to be more intense. Furthermore, holding access to financing constant, the effect of uncertainty on R&D investment is attenuated for large firms. Copyright © 2012 John Wiley & Sons, Ltd.     

Price and Nonprice Competition with Endogenous Market Structure

This paper examines the effect of the intensity of short-run price competition and other exogenous variables that affect gross profit margins—such as the degree of product differentiation and the consumers' responsiveness to quality—on market structure and on advertising and R&D expenditure. A key result is that more intense short-run competition can lead to lower concentration in industries with high advertising or R&D intensity, unlike exogenous-sunk-cost industries. Also, price competition has a negative effect on advertising or R&D expenditure. A case study is also presented, which is consistent with the theoretical results of the paper.