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The role of corporate governance in R&D intensity of US‐based international firms

Pol Herrmann (College of Business, Iowa State University, Ames, Iowa, USA)
Jeffrey Kaufmann (College of Business, Iowa State University, Ames, Iowa, USA)
Howard van Auken (College of Business, Iowa State University, Ames, Iowa, USA)

International Journal of Commerce and Management

ISSN: 1056-9219

Article publication date: 29 June 2010

838

Abstract

Purpose

The purpose of this paper is to study the influence of corporate governance and internationalization on research and development (R&D) investments in US‐based international firms.

Design/methodology/approach

The paper draws from agency theory to examine the influence of corporate governance mechanisms and internationalization on R&D intensity by the use of longitudinal data from 1991, 1994, 1997, and 2000 in a sample of large, manufacturing US firms with international operations.

Findings

The paper finds that CEO total compensation is positively associated with R&D intensity, whereas equity voting power, insider ownership, and duality are negatively associated.

Research limitations/implications

The findings regarding insider ownership confirms agency theory, in that agents will tend to make decisions to maximize their own utility and thus would be expected to reject R&D investments. In terms of duality, the augmented discretion that CEOs assume when they also hold the chairmanship position may reduce the monitoring function of the board, making it easier for the CEO to avoid engaging in short‐term risky ventures. Additionally, CEOs are likely to demand larger salaries when faced with risky decisions because their employment stability and reputation are at stake.

Practical implications

Boards concerned with firm innovation should focus their decisions on CEO salaries on total compensation rather than on short‐term performance. Total compensation may motivate CEOs to commit to R&D investments that lead to innovations despite the risk of failure and detrimental impact on short‐term profits. Firms should be cautious in granting ownership to board members. Although ownership often stimulates commitment to strategic decisions, over‐involvement of board insiders may result in risk aversion, leading to decreases in R&D efforts.

Originality/value

This paper extends the literature by integrating agency theory and organization learning in a comprehensive framework, showing that governance and internationalization play a significant role in firm R&D intensity.

Keywords

Citation

Herrmann, P., Kaufmann, J. and van Auken, H. (2010), "The role of corporate governance in R&D intensity of US‐based international firms", International Journal of Commerce and Management, Vol. 20 No. 2, pp. 91-108. https://doi.org/10.1108/10569211011057236

Publisher

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Emerald Group Publishing Limited

Copyright © 2010, Emerald Group Publishing Limited

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