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Market or government: who plays a decisive role in R&D resource allocation?

Shoufu Xu (School of Finance, Shanghai University of International Business and Economics, Shanghai, China)
Xuehui He (School of Finance, Shanghai University of International Business and Economics, Shanghai, China)
Longbing Xu (School of Finance, Shanghai University of Finance and Economics, Shanghai, China)

China Finance Review International

ISSN: 2044-1398

Article publication date: 9 August 2018

Issue publication date: 20 February 2019

1164

Abstract

Purpose

The purpose of this paper is to empirically investigate the impact of equity market valuation and government intervention on the research and development (R&D) investments of listed companies in China and their relationship.

Design/methodology/approach

Using a manually collected R&D database in the period 2007–2015, this paper constructs a sample of 6,595 firm–year observations and applies the methods of pooled OLS regressions to examine the effects of market valuation and government intervention on corporate R&D expenditures.

Findings

This paper finds that market valuation enhances corporate R&D investments, but there is no evidence that government intervention may significantly affect the R&D investments. Government intervention also decreases the sensitivity of corporate R&D investment to stock price, which implies that government intervention weakens the promotion of market mechanism to corporate R&D investment. Furthermore, these effects are stronger in the non-state-owned firms and the non-regulated industries.

Practical implications

This study suggests that the functional borders of markets and government should be reasonably defined and markets play a decisive role in resource allocation to improve corporate innovation and national innovation.

Originality/value

This paper provides a micro view of the relationship between market and government at the stage of transitional economy in China as well as directions for further research on the relationship between stock prices and corporate investments.

Keywords

Acknowledgements

The authors are glad to thank the anonymous referees for their invaluable comments and suggestions. This paper was supported by the National Natural Science Foundation of China (Grant Nos 71473157, 71503162 and 71773073), China Postdoctoral Science Foundation funded project (Grant Nos 2015M570357 and 2017T100288).

Citation

Xu, S., He, X. and Xu, L. (2019), "Market or government: who plays a decisive role in R&D resource allocation?", China Finance Review International, Vol. 9 No. 1, pp. 110-136. https://doi.org/10.1108/CFRI-08-2017-0190

Publisher

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Emerald Publishing Limited

Copyright © 2018, Emerald Publishing Limited

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