The Determinants of KOSDAQ Firm’s R&D Expenditure

In an increasing competitive environment, companies are all faced with strong need to come up with excellent new products and technology as well as improve their existing products to meet customer needs. Such innovation is a must for them to survive and prosper in such fierce competition. In this regard, expenditure in R&D appears to be an essential factor to enhance productivity. The purpose of this research is to establish a theoretical model to identify determinants of KOSDAQ- listed firms’ R&D expenditure and offer an empirical analysis on the theoretical model through panel data analysis of panel data that includes both time-series and cross-section data of those companies. The empirical analysis had been conducted for 6 years from January 2011 to December 2016. Total 982 companies were selected to fulfill the purpose of the research. Accounting data required was extracted from KOCOINFO, a database provided by the Korea Listed Company Association. The result of the empirical analysis can be summarized as the following. First, all variables excluding the sales growth rate and debt ratio make statistically meaningful factors explaining R&D expenditure. Second, the ratio of market value to book value, equity ratio of one large shareholder, net working capital ratio, and signs of regression coefficient to advertising expenses all go in line with the theory. The regression coefficient signs concerning company scale show negative value. Also, sales growth rate and debt ratio were found to have negative impact on R&D expenditure. Third, the dummy variable on increase and decrease of market value to book value ratio is found to be statistically meaningful and has negative impact on R&D investment spending. Dummy variables on market value to book value ratio and increase and decrease of market value to book value ratio were statistically meaningful and have negative impact on R&D investment spending. The research is distinct from preceding studies in the following aspect. First, it used panel data estimation methods to address heterogeneity issues which may occur from omission of variables not observed. Next, the research performed an empirical analysis of KOSDAQ-listed firms during a recent six-year period. Last, the research added dummy variables on increase and decrease of market value to book value and market value to book value ratio and also conducted a regression analysis based on that. However, it has some limitations as stated below. First, it used figures in financial statements of KOSDAQ-listed companies to estimate their R&D spending. But there is a room for discrepancy between the estimation and the actual spending due to ambiguity in accounting management relating to R&D activities. Second, it is necessary to estimate R&D expenditures with higher accuracy along side other data and information in addition to financial statements. Third, the relationship between other determinants of R&D investment and spending not measured and the actual R&D expenditure is not clearly explained herein. A more organized research is needed to clarify the relationship between those variables and determinants. The fourth is, if a company is under influence of other external factors such as economic slump, the validity and relevance of R&D expenditure model based on financial ratios would be affected. To complement this, a new model reflecting other financial and non-financial elements shall be established.