What Determines Corporate R&D Investment?: An Integrated Analysis of Macroeconomic, Financial and Governance Factors

The investment activities of corporations have been analysed in the following three streams: macroeconomic conditions, corporate finance, and governance structures. However, since the existing explanations have separately analysed the investment activities of corporations in each dimension, they provide only partially appropriate frameworks to figure out what determines a firm’s investment decisions. We thus examine the determinants of corporate investment, especially R&D investment by corporations, by simultaneously operationalising macroeconomic, financial, and governance structural dimensions in one analytical framework. Using 100 large listed Korean firms (1999～2008), our PCSEs panel estimation shows that the corporate R&D investment is affected by all the three dimensions. However, it is noteworthy that in contrast to the results of the separate operationalisation of the three dimensions, our analysis discloses that some macroeconomic, financial, and governance factors newly acquire or lose their influence on corporate R&D investment in the integrated framework. While interest rates are still insignificant, public policy such as government’s R&D expenditure turns out to have a positive effect on corporate R&D investment. Foreign ownership in interaction with internal capital reveals a positive relationship with the firm’s R&D investment. Even though group affiliation itself consistently manifests a positive relationship with a firm’s R&D activities, its interaction with ownership concentration reveals negative outcomes. We therefore suggest that governmental policy for corporate R&D investment should be set up in consideration of diverse, firm-level conditions such as governance structures. Utilization of foreign ownership could be of help to promote corporate R&D investment, since it can attenuate the negative effects of ownership concentration in large Korean firms. The results of our integrated analysis will help managers and the government to establish appropriate business strategies and public policy to implement corporate investment activities more effectively.