The impact of country-level corporate governance on research and development

Abstract

We investigate the process through which country-level corporate governance facilitates firm-level investment in research and development (R&D). Taking cash flow as one of the main determinants of R&D, we derive an econometric model that introduces a number of corporate governance factors (legal protection, financial system, and control mechanisms) to analyze their impact on R&D-cash flow sensitivity. Using data from nine European Union countries, Japan, and the United States, we show that R&D at the firm level is less sensitive to internal cash flow in countries with effective investor protection, developed financial systems, and strong corporate control mechanisms. Specifically, our analysis suggests that the characteristics of the corporate governance system that facilitate R&D are a common law legal environment, minority shareholder protection, strong law enforcement, a bank-based financial system, effective board control, and a strong market for corporate control. This evidence points to corporate governance as a key element in R&D investment, and contributes to the debate on whether country-level corporate governance systems can facilitate R&D projects and, indirectly, promote economic growth

EFFECTS OF CORPORATE AND COUNTRY GOVERNANCE ON R&D INVESTMENT: EVIDENCE FROM EMERGING MARKETS

“…They find that options and golden parachutes have a positive relation to innovation, but simple pay per performance does not. Hillier et al (2011) examine various forms of organization and ownership in developed countries and show that they have an impact on the beta-sensitivity of a firm's R&D to its cash flow. In a related study, Kim and Park (2012) find that ownership structures and cash holdings influence the impact of each other on R&D expenditures.…”

Corporate governance and company performance across Sub-Saharan African countries

“…According to Hillier et al (2011), strong law enforcement reduces the gap in information quality between company insiders and outsiders, which consequently reduces the costs of external financing. Many developing countries, including those in Sub-Saharan Africa, have relatively weak systems of laws and regulations (Rossouw, 2005).…”

Beyond human capital explanations for the gender pay gap among executives: investigating board embeddedness effects on discrimination

“…Formally, our empirical results only indicate correlations and no causal relations. A larger sample would enable us to calculate our empirical models using generalized methods of moments (GMM) (Arellano and Bond 1991) which have been implemented in prior studies (Hillier et al 2011;Pathan 2009) since it is amenable to reduce problems of endogeneity, i.e., a possible correlation between the explanatory variables and the error term. In summary, we hope that we could encourage researchers to extend our study concerning these sample size issues whenever Germany reached the critical mass of female managers to make these kinds of analyses possible.…”