R&D intensity, free cash flow, and technological innovation: evidence from high-tech manufacturing firms in China

ABSTRACT

Technological innovation, which can be classified into major and minor innovation, enables firms to gain competitive and sustainable advantage in the changing environment. R&D investment and financial resources are recognized as two critical factors for fostering technological innovation. Based on a panel dataset of 257 listed Chinese high-tech manufacturing firms over the period of 2008–2015, we explored the effect of R&D intensity on technological innovation and the moderating role of free cash flow using negative binormal regression models. Our results reveal that the relationship between R&D intensity and technological innovation (both major and minor innovation) follows an inverted U pattern in which technological innovation increases with R&D intensity at decreasing rates and falls gradually after R&D intensity exceeds a threshold. Our results also indicate that free cash flow plays a moderating role in the relationship between R&D intensity and major innovation but not in the relationship between R&D intensity and minor innovation. Our study draws attention to the improvement of R&D investment efficiency in high-tech manufacturing firms and sheds light on the importance of holding cash in major innovation-oriented firms.

KEYWORDS:

• Technological innovation
• major innovation
• minor innovation
• R&D intensity
• free cash flow

Acknowledgements

We appreciate the insightful comments from three anonymous reviewers. We thank Rajesh Kumar for providing support during the review process. We are very grateful to Fei Zhao for manuscript discussion, to Bao Sun and Xinyu Li for their assistance in collecting data and to Andrew Riebel for English editing.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes on contributors

Kuang Xin is a PhD candidate from the School of Economics and Management, Tongji University, China. Her research focuses on corporate finance and technological innovation.

Xin Chen is a lecturer from Business School, University of Shanghai for Science & Technology, China. His research lies in venture capital and innovation.

Ran Zhang is a lecturer in the School of Statistics and Information at Xinjiang University of Finance and Economics in Urumqi, China. Her research concerns the supply chain simulation and management information system.

Yuchun Sun is a Professor in the School of Economics and Management, Tongji University, China. His research focuses on business management.