The two faces of R&D investments: push and pull factors

Abstract

Prior research has examined how financial constraints and agency costs affect the allocation of investment in research and development (R&D). However, we still know little about the effect of both factors simultaneously. It is important to investigate this to determine whether the pull or push effect dominates in R&D investment allocation and to determine the causes and extent of R&D investment inefficiency further. While the pull effect reduces investment, the push effect encourages firms to invest more in R&D. The two-tier frontier model was used to examine data from Chinese listed firms from 2009 to 2014. The results indicate that agency costs (the push effect) are the predominant cause of R&D investment inefficiency. The push effect causes 87.97% of Chinese firms to overinvest and leads to an average overinvestment of 41.33% above the optimal level. Moreover, this R&D investment inefficiency is heterogeneous in terms of state ownership structures. A higher percentage of state-owned firms suffer from severe overinvestment. We also found that agency costs result from the principal-principal (PP) and not principal-agent (PA) conflicts in China.