This thesis deals with the firm-, macro-and institutional-level determinants of research and development (R&D) investment, assessing the impact of R&D spending on firm performance and the financing of R&D investment in emerging markets. The recent financial crisis has had adverse effects worldwide. This study finds that the financial crisis had a significant negative impact on firms’ R&D investment in emerging markets. It also finds that the R&D investments of both local firms and multinational enterprises (MNEs) were affected, and that the latter was affected 1.63 times more than the former.
However, when the firms were split between innovative and non-innovative, it was observed that innovative firms continued to invest in R&D during the recession, while non-innovative firms cut down their R&D investment. In addition, it is found that, during a financial crisis, the firm-level determinants of R&D are firm age, firm size, export orientation, debt ratio and foreign ownership. This implies that the assumptions of the resource based view (RBV) hold true, even during a financial crisis. The results suggest that affected and less-/unaffected countries’ R&D determinants behave differently during a financial crisis. They also show that the probability of a decrease in R&D investment in affected countries is 60 percent higher than in less-/unaffected countries. Similarly to firm-level factors, macroeconomic factors also influence R&D expenditure. GDP growth, exports, trade openness, patents and financial crisis are the main macroeconomic determinants of a country’s R&D expenditure. Moreover, analysis suggests that macroeconomic determinants of R&D investment behave differently in advanced and emerging countries, owing to their different nature and purpose, and the countries’ levels of economic development.
In addition to firm and macroeconomic factors, the institutional environment plays an important role in R&D investment in emerging countries. The results show that government effectiveness and rule of law have significant positive impacts, while corruption and political instability have significant negative impacts on R&D investment in emerging countries. However, opponents of country-level factors have claimed that these factors influence the innovative activities and firm performance of emerging countries indirectly. This study finds that investor protection (safeguards) tends to have a greater moderating effect on the relationship between R&D and firm performance than country-level governance (systems). The results indicate that safeguards promote firm-level innovation in emerging markets, while systems are substituted by firm-level corporate governance in emerging countries. Moreover, in the case of risky and uncertain investments such as R&D, investors seek protection from possible losses. It is also observed that R&D financing behaves differently according to different levels of multi-nationality and financial systems. Local firms do not use external funding, while MNEs use both internal and external funding for R&D investments due to the availability of organisational slack. A country’s financial systems may restrict firms from choosing particular sources of finance. Firms within bank-based systems tend to rely on external funding and firms within market-based systems depend more on internal funding for R&D investment. The results indicate that market-based firms follow pecking order theory.
Secondary data for the analysis were collected from various sources, including DataStream, annual financial reports, LexisNexis, the World Bank’s Development Indicators, Worldwide Governance Indicators and Protecting Minority Shareholder data, and the International Country Risk Guide database. Both static and dynamic panel data techniques, including generalised methods of moment (GMM) estimation, were used for the analysis. Dynamic GMM panel estimation was used to control for endogeneity and unobserved heterogeneity, and to provide efficient and consistent estimation even in the presence of heteroscedasticity. The study also adopted an instrumental variable (IV) approach with OLS and Granger causality tests for the analysis. This study will be helpful to various stakeholders, including investors and managers, lenders and policy makers in emerging markets
