Financing the R&D investment of Chinese firms: state-owned versus private firms

ABSTRACT

We investigate the effect of financing constraints on the R&D investment of Chinese listed firms for the period 2010–2020. The sample is divided into state-owned versus private firms, which differ substantially in R&D patterns, financial structures, and other characteristics. We find that, in both state-owned and private firms, internal cash flow significantly affects R&D investment, suggesting the presence of binding financing constraints. Both state-owned and private firms actively manage liquid assets to smooth R&D spending. Debt finance is insignificant for both state-owned and private firms. New stock issues have a significant positive effect on R&D in private firms only, not in state-owned firms. Given that the contribution of private firms to aggregate R&D is increasing, stable stock market conditions may have an important aggregate impact on R&D.

KEYWORDS:

• R&D investment
• financing constraints
• state-owned and private firms
• China

JEL CLASSIFICATION:

• G32
• O32

Acknowledgment

This paper has been developed and substantially modified from the first author(Mei Quan)’s dissertation, advised by the corresponding author. We thank two anonymous referees for many constructive comments.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

¹ China’s total R&D spending by firms, government, and educational institutions accounted for 0.6% of its GDP in 1991. By 2018, China’s R&D expenditure reached 2.1% of its GDP. Source: World Development Indicators, World Bank.

² Quick assets include cash and equivalents, short-term investments, and accounts receivable. Brown, Martinsson, and Petersen (2012) use changes in cash and short-term investments to capture R&D smoothing. If we use cash and short-term investments, however, we lose a lot of observations since sub-components of quick assets are not well reported in the data set. Since cash and short-term investments are two primary forms of quick assets that the majority of firms hold, we use changes in quick assets to capture R&D smoothing.

³ Allen, Qian, and Qian (2005), Boyreau-Debray (2003), Ferri (2009), Guariglia and Poncet (2008), Lin, Sun, and Wu (2015), Liu, Houjian, and Huang (2018), and Xia and Liu (2021) document evidence showing banks’ lending bias in favour of state-owned firms and against private firms in China.

⁴ The big four state-owned banks are the Industrial and Commercial Bank of China, the Agricultural Bank of China, the Construction Bank of China, and the Bank of China.

⁵ We use the median age within state-owned firm and within private firms to divide mature versus young firms. We could use the same cut-off for the mature/young division for both state-owned and private firms. This split, however, leaves too few observations for young state-owned firms and mature private firms to estimate the dynamic R&D equation reliably. The same applies to the sample division based on firm size (real assets).