Trust and R&D investments: evidence from OECD countries

Abstract

This paper examines two potential mechanisms – access to credit and reduction in relational risks – through which social trust can affect R&D investments. Social trust can increase R&D investments by expanding firms' access to external finance with which they can use to fund promising R&D projects. It can also increase R&D investments by reducing relational risks that expose firms to ex-ante and ex-post holdups or expropriation risks. Using industry-level data on R&D investment intensities in 20 OECD countries, I test these mechanisms by evaluating whether more external finance dependent and relational risk vulnerable industries exhibit disproportional higher R&D investment intensities in trust intensive countries. The results indicate that external finance dependent industries and relational risks vulnerable industries experience relatively higher R&D investment intensities in trust-intensive countries. Therefore, the results underline access to external finance and reduction in relational risks as causal pathways linking social trust and R&D investments.

Financial constraint, trust, and export performances: firm-level evidence from Africa

“…Hence, using a one-year lag or two years can be a good proxy for the actual level of trust. This assumption is consistent with extant studies that using a panel time-series data on the trust variable only found little within-country time variation in the trust level (Bjørnskov, 2007; Ndubuisi, 2020b). However, as indicated by the reported standard values in Table A1 in the online appendix, 6 the level of trust varies significantly across countries, which allows us to run a cross-country analysis.…”

“…Knack and Keefer, 1997; Zak and Knack, 2001). Hence, borrowers in such a society have a lower likelihood of default as they are bounded by high moral standards, while credit lenders are more willing to lend to borrowers from such a society because of a reduced concern over default risks (Ndubuisi, 2020b: 3) 3 . Second, a high interpersonal trust level lowers the probability of a firm committing financial fraud (Pevzner et al ., 2015).…”

“…Our study also relates to the literature on the impact of the business environment, particularly those on business contracting institutions, but that has mostly focused on formal institutions while ignoring informal contracting institutions (Aterido et al ., 2011; Beck et al ., 2005; LiPuma et al ., 2013; Roxas et al ., 2013). Finally, this paper is also related to a nascent research strand in international trade examining the relationship between trust and international trade (Ndubuisi, 2020a, 2020b; Roy et al ., 2014; Yu et al ., 2015). To date, this literature has largely focused on country level analysis.…”

Trust, Efficient Contracting and Export Upgrading

“…To empirically examine this conjecture, we utilize an industry-level data across 71 countries over the period spanning 1995-2014. As an empirical strategy, we employ the generalized difference-in-difference method developed by Rajan and Zingales (1998) and has been used extensively elsewhere in the literature (e.g., Levchenko 2007;Nunn 2007;Essaji and Fujiwara 2012;Manova 2013;Crino and Ogliari 2017;Ndubuisi 2020b). In particular, rather than asking whether trust-intensive societies produce and export higher quality products, our empirical strategy evaluates whether industries that are more prone to contractual frictions, such as the classical holdup problem, experience a disproportionately increase in the production and export of higher-quality products in trust-intensive societies than those industries in low-trusting societies.…”

“…In which case, in the absence of trust (which is the focus of the current paper) and effective formal contracting institution (which has been the focus of extant studies), countries would suffer a comparative disadvantage in those industries. For the measure of trust, we follow the trust-related literature (e.g., Zak and Knack 2001;Pelvzner et al 2008;Dearmon and Grier 2011;Ndubuisi 2020b), and use the trust indicator from the World Value Survey, measured as the proportion of a country's population that "agrees" with the statement, "Most people can be trusted". Finally, we rely on the novel method developed by Khandelwal et al (2013) to infer product-quality from bilateral export data.…”