The Impact of Industry Characteristics and IPR Policy on Foreign Direct Investment

This paper investigates the interaction of industry characteristics and intellectual property rights (IPRs) on multinational firm behavior. The results suggest that firms in industries with high capital costs are more likely to maintain control over production knowledge in countries with less intellectual property protection by engaging in foreign direct investment (FDI). Moreover, when IPRs are strong, firms in industries with high investment in research and development (R&D) are more likely to enter a market by licensing to an unaffiliated host firm. JEL no. F23, C25, O34     

Is R&D cash flow sensitive? Evidence from Chinese industrial firms

We hypothesize that research and development (R&D) is sensitive to cash flow fluctuations due to asymmetric information and agency problems in the credit market. We adopt a variant of the Q model for R&D investment using the value of the firm, physical capital and employment to capture firm fundamentals as proxies for investment opportunities. We add cash flow to this specification, and estimate the augmented model separately for R&D participation and spending decisions using data on Chinese industrial firms for the period 2001–2006. We find that R&D participation and spending are sensitive to cash flow fluctuations, conditional on firm fundamentals. We also find that the cash flow sensitivity of R&D varies across firms depending on ownership.     

R&D and patenting activities of foreign firms in China: The case of Japan

This study investigates the research and development (R&D) and patenting activities of foreign firms in China. Utilizing a panel dataset of Japanese affiliates during the period 2001–2007, we first examine the determinants of R&D activity and find that local market-oriented firms place more emphasis on R&D, whereas process export-oriented firms are less likely to conduct R&D. Affiliates within a large business group that has more affiliates have a higher propensity to undertake R&D. Using only firms with positive R&D expenditures, we next estimate the patent production function. Results indicate that the patent elasticity of R&D for Japanese affiliates is high, suggesting that they are more productive on patent production than other firms. Moreover, local market-oriented firms do need more patents to protect their products, whereas scientific firms demonstrate a lower willingness to register patents in China.     

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.     

'Successes' and 'Failures' in the Markets for Technology

Market-mediated contracts for technology trade are bound byseveral transaction costs. This paper argues that as these transactioncosts become less severe, markets for technology can help improvethree market failures: (i) R&D duplications; (ii) externalitiesin potentially public R&D outcomes; and (iii) deviationsfrom marginal cost pricing in the downstream product markets.In addition, with larger markets of potential users, the technologysuppliers will have incentives to produce more ‘general’technologies which span a wider number of firms or industries.Markets for technology also produce new failures. In particular,they induce deviation from marginal cost pricing in the saleof the technology, and they generate externalities associatedwith complementary R&D and other investments made by theindependent buyers and suppliers that operate in them. The paperconcludes by discussing policy implications.     

Advertising, in-house R&D, and growth

This paper develops a quality-ladder model of endogenous growthto study the interplay between in-house R&D and combativeadvertising expenditure, and its implications for economic growth,firm size, and welfare. The analysis shows that, somewhat surprisingly,higher incentives to engage in advertising, although combative,unambiguously foster innovation activity of firms. This, possibly,leads to faster growth and even higher welfare. These resultsrest on two features of the model which are well-supported byempirical evidence. First, if firms incur higher sunk costsfor marketing, concentration and firm size rise. Second, firmsize and R&D expenditure are positively related as largerfirms are able to spread R&D costs over higher sales. Theanalysis also suggests that R&D subsidies are conduciveto R&D and growth without inducing firms to raise advertisingoutlays.     

Self-selection and performance of R&D input of heterogeneous firms: Evidence from China's manufacturing industries

Applying the theories of heterogeneous firms and the propensity score matching difference-in-differences (PSM-DID) method to a rich dataset of Chinese manufacturing firms, this paper examines the self-selection of firm-level R&D input and estimates the net effect of R&D on productivity. The analysis shows that (1) for Chinese manufacturing firms as a whole, R&D input is influenced by firm productivity: more productive firms are more likely to invest in R&D; (2) controlling for the self-selection effect, the net output elasticities of R&D input in one year and two years after R&D input are 3.92% and 5.25%, respectively; (3) although state-owned enterprises (SOEs) are more likely than all other ownership groups to invest in R&D, the R&D input is not productive; (4) although enterprises owned by investors outside of Mainland China are the least likely to invest in R&D, the output elasticity of R&D is more significant and larger in this group than in SOEs and privately owned Chinese firms; and (5) surprisingly, the net effect of R&D is not significant in high-tech industries. Policy implications are derived from the findings.     

The Innovation Threshold

Summary This paper discusses a model for analysing the sales of new products. This model accounts for the fact that, even among those companies with permanent R&D activities, a fraction of the firms did not have sales of innovative products over a two-year observation period. We propose a model in which the fixed costs of introduction are a major concern in the decision-making process. We apply a censored regression model, extended by a firm-specific threshold. We use a structural model to estimate the fixed costs of introducing new products to the market, and explain subsequent sales of innovative products. We examine an indicator of innovative output, i.e. the sales of products ‘new to the firm’. We estimate fixed cost thresholds by using data from the Dutch section of the Community Innovation Survey (CIS) of 1998. R&D intensity, competition, and market structure all have a positive impact on the sales of new products. The most important factors that reduce the fixed cost threshold of introduction are product-related R&D investments, R&D subsidies, and knowledge spillovers. We would like to thank Geert Ridder, Alfred Kleinknecht and two anonymous reviewers for their valuable comments and discussion.     

International capital market integration: Implications for convergence, growth, and welfare

This paper studies the effects of international capital market integration on welfare and the speed of adjustment in a two-region endogenous growth model. Monopolistic firms undertake research and development (R&D) to improve their productivity level. National and international knowledge spillovers affect the returns to R&D. The two countries differ with respect to the initial productivity level and R&D capability (which is a proxy for human capital and structural policies). Long-run productivity gaps are determined by the difference in R&D capability. Over time, there is conditional convergence in productivity levels. The speed of convergence is larger with integrated international capital markets than without. Long-run gaps in consumption levels are larger in the former situation than in the latter. Capital market integration harms (benefits) the leading (lagging) region if domestic spillovers are more important than international spillovers and differences in R&D capabilities are small.The authors research is supported by the Royal Netherlands Academy of Arts and Sciences. He thanks Lucas Bretschger, Theo van de Klundert, and Richard Nahuis, Thomas Steger, and Helmut Wagner for comments on an earlier version.     

Strategic R&D Location in European Manufacturing Industries

We empirically test a model of foreign research and development (R&D) investments that takes into account strategic interaction in R&D location decisions by multinational firms in the context of R&D cross-investments, R&D spillovers and foreign technology sourcing strategies. We find support for most of the predictions of the model in an empirical analysis of the location of patented innovations by the largest European manufacturing firms in 22 ISIC industries during 1996–1997. For technology leaders in Europe, foreign R&D ratios respond positively to host country product market competition, while technology laggards avoid these locations. Foreign R&D by technology laggards increases more strongly with the efficiency of (reverse) international technology transfer while leaders are attracted more strongly to countries with better intellectual property rights (IPRs) protection. Foreign R&D of both technology leaders and technology laggards increases with the size of the local knowledge pool and the size of manufacturing operations in the host country. JEL no.  D21, F23, L16     

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.     

Tax Loss Carryovers in a Competitive Environment*

The fact that incumbent firms can immediately deduct research and development (R&D) investments from taxable income is generally believed to give them a strategic advantage over new firms that cannot deduct the investment cost, but instead generate a net operating tax loss carryover. Using an analytical model, we show that this conventional wisdom need not hold in a competitive environment. We examine operating and investment decisions in a duopolistic industry in which an initial investment in R&D yields an immediate tax benefit for one firm, but creates a net operating loss carryover for the other firm. If both firms invest in R&D, the firm with the net operating loss carryover makes more aggressive capital investment decisions following successful R&D. This may deter the incumbent firm from investing in R&D despite the lower aftertax costs of this investment. Changing the tax loss carryover rules would thus not only affects start‐up or loss firms, but would also affect the investment decisions of profitable firms in the same industry.     

R & D decisions under alternative regulatory constraints

IV. Summary and Conclusions The purpose of this paper has been to extend the range of consequences implied by government regulation of privately owned firms. The analytical framework of Section II concentrated on deriving the implications of alternative degrees of regulation on the firm's research and development (R&D) decisions. The analysis implies that managers of stringently regulated firms have greater incentive to neglect such activities related to the search for and production of valuable market information which increases owners' wealth. Among other things, this implies that firms subject to more restrictive regulatory climates are more likely to commit fewer expenditures to R&D activities.Empirical evidence from the electric power industry was presented in Section III. The results indicate that the interfirm differences in R&D expenditures in this industry can be explained to a large extent by the variability of governmentally imposed regulatory constraints. After controlling for other determinants of R&D behavior, the evidence reveals that electric power firms subject to the most restrictive regulatory constraints do significantly (at the 5 percent level and better) less R&D than firms operating under the weakest regulatory constraints.This paper is based on the author's master's thesis, submitted to George Washington University in May 1976. I gratefully acknowledge the helpful comments and suggestions of Louis DeAlessi and Robert Goldfarb.     

Does an R&D tax credit affect R&D expenditure? The Japanese R&D tax credit reform in 2003

To what extent does a tax credit affect firms’ R&D activity? What are the mechanisms? This paper examines the effect of R&D tax credits on firms’ R&D expenditure by exploiting the variation across firms in the changes in the eligible tax credit rate between 2000 and 2003. Estimating the first-difference equation of the linear R&D model by panel GMM, we find the estimated coefficient of an interaction term between the eligible tax credit rate and the debt-to-asset ratio is positive and significant, indicating that the effect of tax credit is significantly larger for firms with relatively large outstanding debts. Conducting counterfactual experiments, we found that the aggregate R&D expenditure in 2003 would have been lower by 3.0–3.4 percent if there had been no tax credit reform in 2003, where 0.3–0.6 percent is attributable to the effect of financial constraint, and that the aggregate R&D expenditure would have been larger by 3.1–3.9 percent if there had been no cap on the amount of tax credits, where 0.3–0.8 percent is attributable to relaxing the financial constraint of firms with outstanding debts.     

R&D subsidies and business R&D: Evidence from high-tech manufacturing firms in Jiangsu

We investigate how R&D subsidies affect business R&D investments using cross-section data of high-tech manufacturing firms in Jiangsu province of China. Our estimations based on propensity score matching suggest that public subsidies positively influence business R&D investments. Further classifying firms into different groups by size, financial constraints, and ownership, we find that the stimulation effect is more significant and stronger for smaller firms, more financially constrained firms, and private-owned firms. The heterogeneity of policy effects with respect to export status, Relative Comparative Advantage index, region, and industry are also discussed.     

Global outsourcing or foreign direct investment: Why apple chose outsourcing for the iPod

A simple model is presented, where a firm's productivity is endogenized by its R&D investment. It shows that the most productive firms may prefer international outsourcing to foreign direct investment (FDI) in industries with a high innovation share. The high innovation share motivates the firms to economize on organizational cost in order to save resources for R&D investment, making outsourcing preferable to FDI because the former incurs a smaller organizational cost. This model helps explain why Apple Inc., belonging to the electronics industry, which has a particularly high innovation share, launched its innovative iPod through international outsourcing instead of FDI.     

R&D spillovers and the case for industrial policy in an open economy

In this paper we consider the case for subsidies towards firmswhich generate R&D spillovers in open economies. We showthat in the presence of strategic behaviour by firms many expectedresults are overturned. Local R&D spillovers to other domesticfirms may justify an R&D tax rather than a subsidy; R&Dcooperation by local firms over-internalises the externalityand also justifies an R&D tax; and international spilloverswhich benefit foreign firms may justify a subsidy, even thoughthe government cares only about the profits of home firms.     

R&D Subsidies and Foreign Direct Investment

We devise a model in which domestic firms do applied R&D, which can be subsidized by the government, and foreign firms with superior technology can enter in the domestic market. Foreign Direct Investment can act as a substitute of subsidies to improve domestic R&D, the share of domestic leading firms and consumption. Relatively closed economies may benefit from R&D subsidization while relatively open economies may not. For relatively low growth of the technological frontier, it is optimal to subsidize R&D and close the economy to foreign investment but the opposite happens for relatively high growth. Numerical simulations show the economy dynamics after policy experiments.     

Financial Constraints and Other Obstacles: are they a Threat to Innovation Activity?

Summary  In this paper we examine the importance of financial and other obstacles to innovation in the Netherlands using statistical information from the CIS 3.5 innovation survey. We report results on the effect of these obstacles on the firms’ decision to abandon, prematurely stop, seriously slow down, or not to start an innovative project. These results are compared with those from other studies in the Netherlands and other countries. We end with a discussion of policy measures that have been taken to overcome, or at least attenuate these obstacles, such as R&D tax incentives, venture capital financing and policy mix packages.      

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.