Abstract
This paper investigates the financial determinants of research and development (RD Hong Kong, China; India; Indonesia; the Republic of Korea; Malaysia; the Philippines; and Singapore) for the period 2002–2011 using the Oriana database. Panel data regressions show sensitivity of R&D investment to changes in cash flow, indicating reliance on internal financing of R&D and financially constrained firms, and a greater role of debt, rather than equity, as a source of external financing. In terms of alternative uses of funds, dividend payments by firms seem to divert from their spending on R&D, but investments in financial assets do not. In terms of ownership structure, empirical results show that both higher domestic ownership concentration and higher foreign ownership tend to lower cash flow sensitivity of R&D investment, suggesting more stable funding of innovation. Overall, there does not seem to be an extreme preference of firm shareholders for short-term returns at the expense of long-term productivity. However, there is clearly a gain for firms as well as economies they are in with better access to external financing of R&D.
Highlights
Since Krugman’s (1994) commentary on the nature of Asia’s high growth in the 1980s, much emphasis has been placed on the role of technological progress in sustaining economic growth in the region
Results show that the sensitivity of Research and development (R&D) spending to internal funds availability is systematically related to firm characteristics that make it more likely to face financing constraints
The study finds that the greater the direct share of the domestic owner in a firm, or the higher the ownership concentration, the lower is the sensitivity of R&D spending to changes in the level of internal funds as reflected by operational cash flow
Summary
Since Krugman’s (1994) commentary on the nature of Asia’s high growth in the 1980s, much emphasis has been placed on the role of technological progress in sustaining economic growth in the region. Worrisome trends have been observed in Asian economies known to have focused heavily on innovation to sustain growth, in the Republic of Korea, where there has been a observed decline in R&D investment growth during the global financial crisis (Seo, Kim, and Kim 2012). They have tended, presumably by design, to focus on a few handpicked factors. In helping fill the gap, we attempt to do so at a more micro level, using information on listed nonfinancial firms in Asia This provides us with rich data on the possible factors behind innovation spending in the region. With regard to internal financing, it tries to assess whether the observed sensitivity of R&D investment to fluctuations in cash flow can be attributed to binding financial constraints on Asian nonfinancial firms
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