Should Firms in Emerging Markets Invest in R&D? Evidence from China’s Manufacturing Sector

Dachen Sheng () and Heather Montgomery
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Dachen Sheng: Department of Business and Economics, International Christian University, 3-10-2 Osawa, Mitaka 181-8585, Tokyo, Japan
Heather Montgomery: Department of Business and Economics, International Christian University, 3-10-2 Osawa, Mitaka 181-8585, Tokyo, Japan

JRFM, 2022, vol. 15, issue 11, 1-17

Abstract: Analyzing micro-level firm data from the Chinese manufacturing sector, this study provides compelling evidence that firms in emerging markets that invest in research and development (R&D) for product differentiation significantly increase firm performance as measured by market power, profitability, and earning quality. Privately held (non-state-owned), mid-size, Shenzhen exchange-listed firms experience the largest boost to firm performance when they invest in research and development. However, analyzing the contribution of R&D investment to firm market value, we reveal that while R&D investments are valued by institutional investors, the potential for investment in R&D to boost firm performance is not recognized by individual investors, who dominate Chinese financial markets. This finding suggests that managers may under-invest in R&D if equity compensation comprises a large share of the overall compensation package.

Keywords: R&D; product differentiation; market power; profitability; earning quality (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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