Determinants of Corporate R&D Investment: An Empirical Study Comparing Korea's IT Industry with Its Non-IT Industry

Abstract

In our study, we extracted the market, finance, and government factors determining R&D investment of individual firms in the IT industry in Korea. We collected the financial data of 515 individual firms belonging to IT and non‐IT industries between 1980 and 1999 from the Korea Investors Service's database and investigated the empirical relationship between the factors using an ordinary regression model, a fixed effects model, and a random effects model. The main findings of our study are as follows: i) The Herfindahl Index variable representing the degree of market concentration is statistically insignificant in explaining R&D expenditures in the IT manufacturing industry. ii) Assets, which is used as a proxy variable for firm size, have a positive and statistically significant coefficient. These two results suggest that the Schumpeterian Hypothesis may be only partially applied to the IT manufacturing industry in Korea. iii) The dividend variable has a negative value and is statistically significant, indicating that a tendency of high dividends can restrict the internal cash flow for R&D investment. iv) The sales variable representing growth potential shows a positive coefficient. v) The subsidy as a proxy variable for governmental R&D promotion policies is positively correlated with R&D expenditure. This suggests that government policy has played a significant role in promoting R&D activities of IT firms in Korea since 1980. vi) Using a dummy variable, we verified that firms reduced their R&D investments to secure sufficient liquidity under the restructuring pressure during Korea's 1998 and 1999 economic crisis.

Modelling R&D expenditure data with zero observations: two-equation model

“…Yoo and Moon (2006) showed that R&D expenditure and R&D intensity of IT companies are higher than those of other companies in Korea. Lee and Hwang (2003) corroborates this finding.…”

“…First, following the logic of the two famous Schumpeter hypotheses, one would expect large firms and firms that possess market power to be more active in R&D. The results from this analysis show that even though the first hypothesis, that larger firms are more active in R&D, is true in Korea, the other hypothesis, that firms that possess market power are more active in R&D, is not true in Korea. This result is consistent with other studies of Korea (Lee and Hwang, 2003;Yoo and Moon, 2006). However, some foreign studies (Kamien and Schwartz, 1982;Acs and Audretsch, 1988;Link and Rees, 1990;Bhattacharya and Bloch, 2004) showed that small firms were more active in R&D. Therefore, our results reveal the need to improve external conditions for stimulating small firms' R&D activities in Korea.…”

“…There has been much literature published since the 1960s (Comanor, 1965;Vernon and Gusen, 1974, etc.). Moreover, there have been some studies dealing with innovation and R&D activities in Korea (Nam, 1996;Lee and Hwang, 2003;Yoo and Moon, 2006). However, while such case studies of specific firms are of tremendous value in that they enhance the understanding of R&D activities, there is a need to complement these with a large sample of empirical analysis.…”

The Impact of Government Subsidies on Private R&D and Firm Performance: Does Ownership Matter in China’s Manufacturing Industry?

“…Empirical evidence [12,28,61] shows that firm size has a positive impact on R&D investment and firm performance. Hence, we expected a positive relationship between firm size and R&D investment and between firm size and firm performance.…”

Determinants of Business Model Maturity

“…proximity to academic centers and access to scientific and research infrastructure (Zucker et al, 1998), advanced technology and research equipment, including scientific-technological parks (Audretsch and Feldman, 1996;Pelle, Bober, and Lis, 2008) as well as access to sources of financing (Lerner, Shane, and Tsai, 2003;Brown, Fazzari, and Petersen, 2009;Gorodnichenko and Schnitzer, 2010;Aghion, Askenazy, Berman, Cette and Eymard, 2012). On the other hand, in terms of risk, the success of a research and development project is dependent on skill in applying for research grants (Almus and Czarnitzki, 2003;Becker and Pain, 2003;Lee and Hwang, 2003;Klette and Moen, 2012). Ali-Yrkkö (2004) calls attention to the fact that financing research and development through public funding can be seen as a lowering of the private cost of research and development projects thanks to which the undertaking of unprofitable projects may prove profitable.…”