Corporate Governance and Its Impact on R&D Investment in Emerging Markets

ABSTRACT

Corporate R&D activities are inherently risky but also difficult to monitor. Against this background, we examine the impact of ownership concentration and legal shareholder rights protection on corporate R&D investments in emerging markets. Based on a comprehensive sample of publicly listed firms from 24 countries, we find that R&D intensity is lower in firms with (strategic) block ownership, and this effect is more pronounced in countries with stronger shareholder rights protection. This suggests that, similar to the situation in developed economies, dispersed ownership, which allows shareholders to diversify their investment risks, is beneficial for corporate R&D and that this effect is intensified by more developed institutions.

KEY WORDS:

• emerging markets
• ownership
• R&D investment
• shareholder rights protection

Acknowledgments

Parts of this research were conducted while Marc Steffen Rapp was a Visiting Researcher at the Department for Financial Management and Capital Markets, Technische Universität München (TUM). Hospitality of TUM is gratefully acknowledged. We would like to thank the editor (Ali Kutan) and two anonymous referees. Also, we would like to express our sincere gratitude for helpful comments of Johannes Beyenbach, Elena Mavropulo, Daniel Powell, the participants of the 5th International Conference on Corporate Governance in Emerging Markets at HHL Leipzig Graduate School of Management and doctoral seminar at the University of Giessen. Special thanks go to the discussant at the 5th International Conference on Corporate Governance in Emerging Markets, Prof. Subrata Sarkar.

Funding

We would like to express our sincere gratitude for the financial support of Fritz Thyssen Stiftung.

Notes

1. Starting with the seminal “Theory of economic development” introduced by Joseph Schumpeter in 1912, the economic literature has provided substantial evidence supporting this view (see Xiao 2013; or Aghion and Durlauf 2014; references therein).

2. Own analysis based on the OECD Main Science and Technology Indicators, accessed September 30, 2016, http://stats.oecd.org/Index.aspx?DataSetCode=MSTI_PUB.

3. Another prominent example from micro-data is Samsung Electronics headquartered in South Korea that has been launched as a producer of 12-inch black-and-white TVs in 1969, and till the end of 2015 was recognized as the second world’s largest information technology company, the second best in the number of patents granted, the world’s largest producer of smartphones, and the second largest manufacturer of LCD TV. Referring to the company strategy and in line with the innovation–growth nexus, the key of the company’s success has been seen in becoming one of the world’s top R&D-intensive corporations: over 2005–2014, Samsung Electronics invested ca. 78.5 billion USD in R&D with the average growth in R&D investment of 22% and the respective average growth in revenues of 10% [own analysis based on the Thomson Reuters data].

4. There are, however, numerous studies that deal with the issue in a developed economy context, see for instance, Aghion, Reenen, and Zingales (2013), Brossard, Lavigne, and Sakinç (2013), Brown, Fazzari, and Petersen (2009), Driver and Guedes (2012), Hillier et al. (2011), Hosono, Tomiyama, and Miyagawa (2004), Munari, Oriani, and Sobrero (2010), and Schmid et al. (2014).

5. In unreported results, we show that all variables used in our models are weakly correlated, with maximum correlation of 0.29. The correlation coefficient between ownership concentration and R&D investment is negative and amounts to −12.2%.

6. Due to this restriction, we are induced to reduce our sample and include only firms with 5 years of observable and complete accounting information.

7. Due to the small to very small values on R&D intensity in emerging markets, dependent variable “R&D/Sales” is multiplied by 100 in all regression analyses. This transformation is considered in the interpretation of results.

8. Though not reported in Table 4, the analyses of marginal effects have shown that the effect of change in Block on the conditional mean of R&D intensity is equal to 0.003 that is in accordance with expectations given small variation in the R&D intensity.

9. Please note that due to space limitations we do not report these results. However, they are available from authors upon request.

10. Even though the Financier index, by construction, has a time series variation due to annual changes in the index of rule of law, we estimate an alternative specification without country-fixed effects. The results remain qualitatively unaffected. We thank an anonymous referee for this suggestion.

11. We thank an anonymous referee for suggesting this robustness test. Meanwhile, results obtained from system GMM estimation are not reported due to vulnerability of Hansen test statistics to the quadratic specification.

12. In untabulated tests, we obtain qualitatively similar results, when applying (i) alternative sampling procedures (random sampling, elimination of high-income emerging markets, and elimination of transition economies); (ii) alternative definitions for the ownership concentration (block threshold at 10%, the share of three largest shareholders); and (iii) alternative definitions of the Financier index (including creditor rights protection, separate consideration of the components of the Financier index).

Additional information

Funding

We would like to express our sincere gratitude for the financial support of Fritz Thyssen Stiftung.