Advertising And R&D Investment

As Sutton (1991) told us that there is interrelation between advertising investment and R&Dinvestment and both of them elevate intangible assets of the firm. Firm invests R&D to improvethe quality of its products and then uses advertising to send the information of its products to theconsumers. Besides, Brander and Lewis (1986) argued that product markets and financialmarkets have significant linkage. So based on Brander and Lewis (1986) and Sutton’s (1991)theory, this study investigates the relationships between debts, advertising and R&D investment.We establish our framework after reading and researching other studies carefully. Firstly, weframe our theory model based on the theory of Brander, Lewis (1986) and Sutton (1991). Then,we obtain our propositions by model analysis. After that, we employ China’s A-share listedcompanies’data to test and verify the propositions and acquire our final conclusions.The main conclusions of this study are summarized as follows. Firstly, debt both hasstimulating and inhibitory effects, which stimulates advertising investment while inhibits R&Dinvestment for the different targets of advertising and R&D investment. Secondly, currentliability motivates advertising and Nun-current liability heightens R&D investment, generally.Thirdly, advertising is complementary with R&D in manufacture industrial but substitute withR&D in non-manufacture because the investment elasticity of advertising and R&D is low inmanufacture industries while high in non-manufacture industries. Fourthly, manufacture firmhighlights R&D investment but non-manufacture firm prefer to advertising investment whichmeans the marginal profit ratio of R&D investment is high in manufacture industriesbut the marginal profit ratio of advertisement investment is high in non-manufacture industries.Furthermore, the difference of advertising and R&D investment is large between manufacturefirms but small between non-manufacture firms.This study both has theoretical and practical values. The conclusions of this paper promotethe development of the theory of industrial organization and they can also be regarded asguideline for firms.