The negative impact of R&D capitalization: A value relevance approach

Abstract

Accounting for R&D costs is an open issue. SFAS N°2 mandates that all R&D costs must be immediately expensed. IAS 38 requires capitalization of R&D costs if they meet certain criteria. Recent research papers show the value relevance of capitalized R&D. We test the value relevance of R&D reporting in a sample of 197 French firms between 1993 and 2002. The French context provides an interesting field for R&D value relevance studies because both accounting treatments of R&D costs (expensing and capitalization) are allowed. Unlike previous studies, we find that capitalized R&D is negatively associated with stock prices and returns. This negative coefficient on capitalized R&D implies that investors are concerned with and react negatively to capitalization of R&D. We also find that the firms choosing to capitalize (successful) R&D are smaller, more highly leveraged, less profitable and have less growth opportunities. Taking into account these characteristics, our robustness checks confirm that capitalized R&D is not associated with higher prices and is related to lower returns.     

R&D and regional competitiveness: a study of global entrepreneurial firms

We quantify, using data from the World Bank’s Enterprise Surveys and the World Economic Forum’s Global Competitiveness Index, the empirical relationship between global competitiveness and R&D investment activity as well as the independent relationship between global competitiveness and R&D investments across geographic regions of economic development. We also explore alternative measures of the effectiveness of R&D investments. Our findings suggest that R&D investments are a possible policy target variable in high-income regions for policy makers to consider for increasing firms’ global competitiveness.

     

Favorable strategies for the success of entry into new technological areas: an entrepreneurial perspective

This study considers the act of entering into new technological domains for R&D purposes as one of the most intense entrepreneurial activities within large established firms, referring to it as R&D entrepreneurship. Attempting to detect factors that could strengthen (or weaken) the impact of R&D entrepreneurship on innovation performance, I examine the moderating role of three important R&D strategies, namely the knowledge plurality, internal focus, and R&D collaboration. I empirically test the hypotheses developed in this study on secondary, longitudinal economic and patent data from a sample of 139 firms from the industries of pharmaceuticals, biotechnology, and chemicals for a 7-year period, using fixed-effects negative binomial regression models. Findings support that the relationship between R&D entrepreneurship and innovation performance is positively moderated by knowledge plurality but negatively by internal focus and R&D collaboration.

     

The R&;D and productivity relationship of Korean listed firms

This study analyzes the relationship between R&D investment and the productivity of Korean R&D-engaged firms. An interdependent chain of equations including the propensity to invest, R&D investment and productivity are estimated in a multi-step procedure accounting for selectivity and simultaneity biases. Using Korean firm level panel data of listed firms from 1986 to 2002, we find four main empirical results. First, there is a two-way causal relationship between R&D investment and productivity for Korean listed firms. Second, Chaebol firms were associated with lower R&D growth as well as lower labor productivity growth in comparison to non-Chaebol firms. Third, there was a substantial reduction in growth rates both in R&D investment and labor productivity in 1997-1998, immediately following the Asian financial crisis. Fourth, considering the positive feedback effect from productivity growth to R&D growth, a decrease in R&D investment growth after the Asian financial crisis should have been harmful by further decreasing productivity growth.     

The U-shaped effect of R&D intensity on employee downsizing: evidence from Spanish manufacturing firms (1994–2010)

Abstract

This study explores an empirically untested issue: the relationship between the level of a firm’s R&D intensity and employee downsizing. Basing our conceptual development on the Resource-Based View of the firm, we argue that a linear relationship is a poor approximation of the proposed relationship. Instead, we find theoretical insights supporting the logic that employee downsizing decreases as firms shift from low to moderate levels of R&D intensity but increases as firms change from moderate to high levels. This prediction suggests that a U-shaped link is a better representation of the way in which a firm’s R&D intensity can affect downsizing. This hypothesis is tested and confirmed using a sample of Spanish manufacturing firms during the 1994–2010 period. We also propose a novel empirical tool (i.e. dynamic probit models) that is especially useful for addressing the potential endogeneity and simultaneity problem in studying this relationship. Implications for future research and practice are presented along with the conclusions of our findings.     

Learning from R&D outsourcing vs. learning by R&D outsourcing

We analyze how research and development (R&D) outsourcing influences product innovation. We propose a separation between learning from R&D outsourcing, whereby the firm improves its ability to innovate by using outsourced R&D directly in new products, from learning by R&D outsourcing, whereby the firm indirectly uses outsourced R&D by integrating it with internal R&D to create new products. Building on the knowledge-based view, we argue that learning from R&D outsourcing is likely to have an inverse U-shaped relationship with product innovation, because the initial benefits of using outsourced component R&D knowledge to innovate products is eventually outweighed by the hollowing out of the firm's ability to innovate. In contrast, we propose that learning by R&D outsourcing is likely to have a U-shaped relationship with product innovation, because the initial challenges of integrating internal and external R&D are eventually overcome, resulting in more innovations. Finally, we distinguish between domestic and foreign R&D outsourcing and propose a liability of foreignness in R&D outsourcing as it has a lower impact on new products than domestic R&D outsourcing. The empirical analysis shows that outsourced R&D has an inverted U-shaped relationship with the number of new products, while the interaction between outsourced R&D and internal R&D has a U-shaped relationship with the number of new products. It also shows that domestic outsourced R&D has a higher positive impact on the number of new products than foreign outsourced R&D.     

Strategie Orientation and Export Performance

Abstract

The purpose of this paper is to examine the linkage between strategic variables and the export performance of firms in the United States, Germany, and Japan. R&D Intensity, Capital Intensity, Average Collection Period, Debt Leverage, and Labor Productivity are used as measures of strategic variables. R&D intensity and Labor Productivity are found to have a strong and positive association with export performance in all three countries. Capital intensity and average collection period also have significant relationship with export performance in the United States and Japan, respectively.     

Family management,family succession,and R&D investment: An empirical study

Using data from the statements issued by A-share family firms listed on Chinese stock markets between 2008 and 2019, this paper explores the impacts of family management and family succession on R&D investment. We draw on the perspective of restricted and extended socioemotional wealth and differentiate exploitative R&D and explorative R&D in a detailed study. The study finds that the proportion of family members among board members or senior executives and the kinship of the CEO or chair of the board of directors have different effects on R&D investment, indicating that a diversity exists in how family members identify their role within the company. Furthermore, the participation of the controller’s children in the enterprise can promote explorative R&D investment instead of exploitative R&D, but only during the process of intergenerational succession. The findings differ from prior research in calling attention to the facts that the impact of family management is not always homogeneous owing to the dispersion of family members into different positions, and it can be misleading to conclude that R&D investment is more conservative in family businesses without considering the structure of R&D investment.

     

Replicating the R&D investments and financial structure relationship: evidence from Borsa İstanbul

I revisit the empirical relationship between R&D investments and financial structure by trying to replicate seminal paper of Aghion et al. (J Eur Econ Assoc 2:277–288, 2004). In the widely cited study, Aghion et al. (2004) found evidence of a nonlinear (an inverted U-shape) relationship—firms with positive R&D tend to use more debt than firms with zero R&D, but the use of debt falls with R&D intensity—in a sample of U.K. firms from 1990 to 2002. In order to review their significant findings, I use panel data of 177 Turkish manufacturing firms listed in Borsa ?stanbul from 2007 to 2016. Using Aghion et al.’s (2004) model specifications, I found no evidence of an inverted U-shape relationship or of any effect of R&D intensity on the leverage ratio. The study thus suggests that the effect of R&D investments on the financial structure may vary with the different samples of countries and cannot be universally generalized.     

Dynamic Spatial Monopoly with Product Development

Abstract

The optimal R&D investment in product innovation of a profit-seeking monopolist is characterized vs that of a social planner in a spatial market with transportation disutility, under full market coverage. It is shown that the planner's incentive to innovate is always weaker than the monopolist's, since the planner trades off the minimization of the social cost of transportation against the cost of R&D.     

The R&D knowledge base in city-agglomerations and knowledge searching in product innovative SMEs

ABSTRACT

This paper looks at the relation between the R&D knowledge base of city-agglomerations and knowledge sourcing in product innovative small and medium-sized enterprises (SMEs). The small open Belgian economy is used as a test case. The characteristics of the city-agglomeration’s R&D knowledge are posited to be instrumental for SMEs’ reliance on particular sources of information for innovation. The R&D knowledge base is studied as a multidimensional concept consisting of R&D capacity, R&D specialization and R&D diversification. A representative sample of product innovative SMEs drawn from two waves of the Community Innovation Survey between 2008 and 2012 reveals that a strong R&D capacity at city-agglomeration level favours private external information sources for innovation, but has no influence on the likelihood to rely on public sources for innovation. Accordance between specialization of the private R&D knowledge base and the SME’s activities positively influences the use of clients as information sources for innovation, whereas under these circumstances supplier responsiveness turns out to be less frequently solicited for. A more diversified private R&D environment reduces the reliance on universities and public research organizations as information sources for innovation. A public R&D knowledge base specialized in natural sciences or engineering favours information sources from universities.     

The cognitive and the action-oriented elements of competence along the innovation process – evidence from R&D teams in the medical equipment sector

Abstract

Organizations are constantly searching for ways to enhance their innovative capacity and to sustain their competitive advantage. Much of the literature focuses on knowledge as the key driver for this pursuit. Unlike other studies, we define experience and knowledge as two basic elements of competence by borrowing from the experiential and cognitive learning theories and contrast their impact on the innovativeness of R&D teams. Building on the competence based perspective, we posit that the differences in competence inputs explain variations in team innovation performance along the innovation process. To test our assumptions, we analyzed the aggregated knowledge and experience levels for different technology competences of 868 employees in 49 R&D teams in a large contract-engineering corporation in the medical equipment sector. The findings reveal that technology experience is particularly fruitful within innovation implementation and is a driver for successful market introduction. The research contributes to the understanding when competence elements are especially important.     

The impacts of family involvement on R&D investment intensity in firms: Evidence from China

Drawing on the perspective of socioemotional wealth, this paper explores the types of family involvement in family firms and their impacts on R&D investment intensity. Using data from the forecasts issued by A-share family firms listed on Chinese stock markets between 2008 and 2019, the study finds that the separation of ownership and control is negatively associated with R&D investment intensity in non-high-tech firms, whereas potential gains of socioemotional wealth from R&D activities by high-tech firms produce a positive influence that offsets the negative impact of the separation of ownership and control on R&D investments. It reveals the importance of gains of socioemotional wealth. In contrast to the separation of ownership and control, family involvement in management is negatively associated with firms’ R&D investment intensity in both high-tech firms and non-high-tech firms. Our results capture the diversity of family members’ identity recognition, which leads to family members’ different evaluations of the potential gains and losses of socioemotional wealth. Overall, the distinction between high-tech family firms and other family firms is shown to be significant, as is the distinction between the impacts of different types of family involvement.

     

The effects of slack resource of R&D professionals on firm performance: evidence from traditional manufacturing firms in an emerging economy

Abstract

As an important component of organizational human resource slack (HR slack), the slack of research-and-development (R&D) professionals has been studied by several authors. However, it remains unclear whether and how this small component of general HR slack, i.e. the slack of research-and-development professionals (RHR slack), may affect overall firm performance in an emerging economy without much R&D tradition or pro-R&D institutions. Based on two organizational theories, i.e. institutional theory and the resource-based view of the firm (RBV), we propose competing hypotheses on the relationship between RHR slack and firms’ accounting performance. We also examine whether the relationship between RHR slack and firm performance should be linear or curvilinear. Finally, we also test the relationship between RHR slack and other dimensions of firm performance. Several interesting findings have been obtained. For instance, neither the perspective based on institutional theory nor that based on RBV can fully predict all types of RHR slack-performance relationships, be these relationships linear or curvilinear.     

R&D Cuts and Subsequent Reversals: Meeting or Beating Quarterly Analyst Forecasts

Abstract

Among firms that meet or beat earnings expectations, we find that cuts to R&D spending are more prevalent in Q4 relative to other interim quarters. This is consistent with the relative costs of real-activities management (accruals-based earnings management) decreasing (increasing) in Q4 due to the annual audit. More importantly, we find that the subsequent reversal of such R&D cuts is more prevalent and economically more significant following Q4 cuts relative to the reversals that follow cuts in other interim quarters. Our findings suggest that examination at the quarterly level (rather than annual level) lends new insights into the current debate regarding the prevalence of potentially value-destroying R&D cuts that managers make. Indeed, our findings suggest that some cuts may merely be temporary deferrals of R&D outlays.     

Adoption,diffusion, and public R&D

This paper studies the impact of public RD&D (Research, Development, and Demonstrations) on the market penetration of a new government-sponsored technology. First, the technology adoption behavior of a firm under uncertainty is reviewed. Secondly, the diffusion of the new technology in a competitive industry that benefits from learning-by-doing is analyzed. Numerical simulations are conducted to determine the effect that variations in government R&D policies have on the rate and level of market penetration. Productive R&D investments affect thelevel of diffusion and R&D demonstrations therate of diffusion.     

Capitalization of R&D and the Informativeness of Stock Prices

Abstract

This paper presents both a new approach to studying the consequences of accounting choice and a unique sample to examine the effects of accounting choice in the R&D context. We investigate the effect of firms' decision to capitalize R&D expenditures on the amount of information about future earnings reflected in current stock returns, as captured by the association between current-year returns and future earnings (FERC). We use a sample of UK firms, which includes both R&D capitalizers and expensers. An important feature of our tests is our use of a two-equation system to control for the endogeneity of the accounting choice (i.e. self-selection). Proponents of capitalization claim that it enables management to better communicate information about the success of projects and their probable future benefits. Consistent with this, we find that capitalization is associated with higher FERC than expensing.     

How does R&D intensity influence firm explorativeness? Evidence of R&D active firms in four advanced countries

Despite R&D is seen as a starting point of innovation, firms usually confront a trade-off in allocating limited R&D resources to either exploratory or exploitative activities. Relative to the latter, the former produces a more distinctive variation from the prior knowledge base and helps the firm tap into new opportunity. Given the increasing importance of firm explorativeness in the fast changing environments, the influence of R&D investment on firm explorativeness is not yet conclusive in the literature, not to mention whether the increased R&D investment induces firms to become more explorative. This study aims to generate insight into how and when firm explorativeness is determined by their R&D intensity. As a notion of the use of knowledge new to the organization, firm explorativeness is treated as the degree of using knowledge new to the organization in the pursuit of innovation. Based on a panel data of 1267 firm-year observations in four advanced countries during 1999–2003, the results reveal that a higher level of R&D intensity makes firms more exploitative and less explorative. Nevertheless, the negative relationship between R&D intensity and firm explorativeness is found to be alleviated in the presence of technological opportunity or financial slack. The configurational model sheds further light on the combined and relative weight of two moderators.     

Internationalization of R&D and Operations in Dominant Product U.S. Firms

Abstract

An empirical study of a sample of 38 U.S. dominant product firms operating in manufacturing industries was undertaken to trace the patterns of internationalization of R&D and operations. First, the results of our analysis revealed that internationalization of R&D and operations were a significant part of the evolving internationalization strategies of the dominant product firms we studied. Second, while internationalization of operations was influenced by international configuration via global standardization, the internationalization of R&D was influenced by international configuration via national responsiveness and by competitive positioning via differentiation. Third, the results highlight the fact that the internationalization moves of dominant product firms are not all similar, but depend on the international configuration and competitive positioning pursued by the firms.     

Environmental Determinants of Public Sector Innovation: A study of innovation awards in Canada

Abstract

In this article, we conduct an empirical study of administrative innovation in the Canadian public sector by examining applications to the Innovative Management Award of the Institute of Public Administration of Canada (IPAC). After a review of the literature on innovation in the public sector and of the history of this award, we come to the conclusion that the relationship between innovation and environment has been studied only sparingly, which explains the focus of our research and our hypotheses. Through an analysis of award applications over 21 years, and of award finalists and winners, we demonstrate that such environmental variables as strength of the economy, size of the civil service, deficits, unemployment rate, investment in R&D, and type of government have important consequences for administrative innovation in the public sector. We also suggest some implications of our findings for future research on this subject.