On the Relations between R&D Investments and Financing Constraints in South Korea

Abstract

RD independent variables that are allowed to be endogenous, meaning that they are correlated with past and possibly current realizations of the error; fixed effects; and heteroskedasticity and autocorrelation within subjects. We present our findings in three categories. First, we find evidence that R&D investments are positively related to cash flow, implying that R&D investments is sensitive to the availability of cash flow, which financially constrains corporate R&D activities due to imperfect capital markets and unique characteristics of R&D investments. Second, cash holdings and trade credit are found to have insignificant impacts on R&D investments, suggesting that Korean firms are not engaged in R&D smoothing through cash holdings and/or trade credit when they temporarily experience cash shortage. Finally, for external financing we show that R&D investments are affected by debt financing, but not by equity financing in Korean firms. In the absence of equity issues for R&D activities, policymakers might want to consider stock market to take active roles in funding R&D activities when R&D investment demand outstrips internal financing.