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How does the internal capital market influence R&D spending? New evidence

Xin Xiang (Shenzhen Audencia Business School, Shenzhen University, Shenzhen, China) (School of Business, Macau University of Science and Technology, Taipa, Macao)

International Journal of Emerging Markets

ISSN: 1746-8809

Article publication date: 20 May 2021

Issue publication date: 21 March 2023




The purpose of this study is to examine whether and how internal capital markets mitigate financial constraints and enhance firms' willingness to engage in R&D projects.


The study uses panel data relating to 2,095 publicly traded firms in the Chinese A-share market for the period 2007–2019. The tobit regression method is applied to explore R&D investment–cash flow sensitivity of group affiliates, while the systematic generalised method of moments and dynamic ordinary least squares models are adopted to address the endogeneity problem in the robustness test.


This study finds that firms affiliated with business groups demonstrate lower R&D investment–cash flow sensitivity than non-affiliated firms do and that R&D investments are significantly influenced by the cash reserves of other group members. In terms of financing channels, this study demonstrates that group firms use internal cash and equity financing to support other members' R&D investments, while debt financing does not influence member firms' R&D investments. In addition, this study discovers that R&D spending harms the stock and operating performance of some group members.

Practical implications

The findings of this study enable business groups to focus on resource allocation and investment efficiency.


Although prior studies indicate that internal capital markets can enhance R&D spending, few studies reveal the mechanisms through which internal capital markets benefit R&D. This study uses a unique methodology to test the ability of the internal capital market to enhance R&D spending. In addition, group firms use internal cash flow and equity financing to support partners' R&D projects.



Xiang, X. (2023), "How does the internal capital market influence R&D spending? New evidence", International Journal of Emerging Markets, Vol. 18 No. 4, pp. 886-907.



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