Multinational corporations versus domestic corporations: a comparative study of R&D investment activities

Abstract

This paper empirically examines the effect of the degree of a firm's multinationality on the firm's R&D activities. In particular, based on the Internalization (and the Eclectic) approach to the development of multinational corporations this paper examines whether R&D investment influences the market value of firms differently between domestic corporations (DCs) and multinational corporations (MNCs). This paper further investigates how differently firm-related factors based on the Tobin's Q theory affect a firm's R&D investment between DCs and MNCs. The results show that R&D expenditures as a percentage of sales are, on average, significantly greater for MNCs than for DCs, indicating that MNCs are on average more R&D intensive. After controlling for firm and market-related factors, R&D expenditures are found to have a persistently positive effect on the market value of both DCs and MNCs, with a more pronounced effect for MNCs. These findings are consistent with the predictions by the Internalization theory. The results further show that there exist notable differences in R&D determinants between DCs and MNCs. While prior-year R&D expenditures and cash flows are significantly positively related to current-year R&D expenditures for both DCs and MNCs, prior-year debt ratio has a significant negative impact on DCs’ current-year R&D expenditures, but has little impact on MNCs’ R&D expenditures. These results suggest that a firm's degree of multinationality plays an important role in determining the firm's R&D expenditures.