Research On Effects And Mechanisms Of Business Cycle On Firms R&D Investment And Efficiency

Innovation is the fundamental driving force for social development and human progress,and firm R&D investment is the foundation of economic development.In recent years,China's economy has entered a period of slow growth,resources constraints have intensified,demographic dividend has vanished,and economic growth depending on high input and high energy consumption has come to an end.R&D investment not only affects the competitiveness of firms,but also plays an important role in driving the whole economic development and transformation.In turn,R&D investment decisions of firms are also affected by economic development itself.Studies have found that companies adapt to macroeconomic changes by adjusting internal expenses(Sun Zheng and Liu Hao,2004).Empirical evidence from developed countries indicates that corporate R&D expense is higher during the economic expansion than it is during the economic recession,that is,R&D investment is a pro-cyclical(Barlevy,2007).However,China's innovation investment has increased as GDP growth rate declined and China entered the phase of economic contraction(Cheng Huifang et al.,2015),showing an opposite trend from developed countries such as the United States.Meanwhile,the government has constantly increased its support for innovation and its subsidy for corporate innovation.The situation poses an interesting question: what is the internal mechanism between firm R&D and macroeconomy under Chinese institutional background,and on top of which what role does government support and market mechanisms play?Scholars have extensively discussed the internal mechanisms of cyclical changes in R&D investment.Some scholars believe that the R&D investment is counter-cyclical,because of the “opportunity cost hypothesis”,that is,during the economic contraction,the profitability of production activities declines,thus the opportunity cost for R&D decreases,which in turn leads to R&D activities concentrated in the economic contraction period(Schumpeter,1939;Aghion and Saint-Paul,1998).Other scholars believe that R&D investment changes is procyclical due to financing constraints(Himmelberg and Petersen,1994),innovation externalities(Barlevy,2007),economic cycle sustainability(Ouyang,2011),etc.(Walde,2005;Comin and Gertle,2006;Francois and Lloydellis,2003;Shinagawa,2013;Luckraz,2013).Cheng Huifang et al.(2015)found that China's R&D investment is counter-cyclical,but they did not explore the reason.Different from developed countries,the Chinese government has greater control over macroeconomic and corporate decisions.Since the economic growth slowdown,in order to boom the economy and find the new economic growth mode,the Chinese government has implemented an innovation-driven strategy by supporting science and technology and increasing corporate R&D subsidy.Then,is the countercyclical relationship derived from the opportunity-cost hypothesis,or is it a result of the unique mechanism in the Chinese institutional background?Furthermore,the literature has shown that the improvement of corporate R&D capability depends on not only the R&D investment,but also the utilization efficiency of R&D resources(Zhang et al.,2011).Obviously,understanding the inherent logic of the economic cycle affecting R&D efficiency is conducive for the government to formulate appropriate innovation support strategies under different economic cycles.However,there are few literature on this subject.Using data of Chinese listed companies from 2006 to 2017,we study the impact of the business cycle on corporate R&D investment,innovation efficiency and subsidy efficiency.We conclude several findings.First,R&D investment is countercyclical in China.Firms invest more in R&D during economic contraction.Second,the countercyclical changes in R&D investment result from government support rather than the “opportunity cost” hypothesis proposed by western scholars.Specifically,during the economic contraction period,companies have received more R&D subsidies.The more R&D subsidies,the more countercyclical R&D investment.Compared with private firms,state-owned firms have received more R&D subsidies during the economic contraction period,and the countercyclical effect of state-owned firms' R&D investment is more pronounced than that of the private firms.During the economic contraction,there is a significant positive correlation between production/ investment and R&D investment,opposite of a substitution effect predicted by the “opportunity cost hypothesis”.Third,the innovation efficiency of firm is higher during the economic contraction period.This effect is stronger in developed markets,but not significantly different between stateowned and private firms.Fourth,the subsidy efficiency of firm is higher during economic contraction,and this phenomenon is more obvious in developed markets and highly competitive industries.We also conducted a series of robustness tests,including:(1)Using other metrics for economic cycles;(2)Using other metrics of innovation efficiency;(3)accounting for the time lag effect of economic cycles to R&D.This article consists of seven chapters.The main contents of each chapter are as follows:The first chapter is the introduction,which mainly introduces the research background,main content and structure,research methodologies,contribution.The second chapter is about Chinese institutional background.This chapter introduces the development of China's science and technology innovation system,the government policy during economic contraction,the budget constraint and policy burden of state-owned firms.In the process of China's transition from a command economy to a free-market economy,the government has always played a leading role in the reform of the science and technology system.Although during the economic recession,countries around the world generally implement economic stimulus plans,our government has greater regulatory functions for the real economy.Since entering the economic contraction period,China has successively launched the “4 trillion plan”,long-range plan for adjustment and rejuvenation of10 sectoral industrial,and "Made in China 2025",which have effectively promoted the R&D investment of Chinese firms.State-owned firms obtained more innovative resources and thus took the task of promoting national innovation during the period of economic recession.The third chapter is theoretical analysis.Based on the national innovation system theory,this chapter analyzes that government support may be the reason for the counter-cyclical characteristic of the Chinese R&D investment,rather than the“opportunity cost hypothesis” proposed by Western scholars.Secondly,based on the “environmental pressure theory”,we found that the pressure brought by the macroeconomic contraction has improved the firm R&D efficiency and government subsidy efficiency.The fourth chapter conducts an empirical test on the mechanism of economic cycle on R&D investment and finds that: first,China's R&D investment is countercyclical and higher during the economic downturn.Second,the government supports innovation more during the economic contraction.Compared with firms with less R&D subsidies,the R&D investment is more counter-cyclical in firms with more R&D subsidies.Third,compared with private firms,state-owned firms have gained more subsidies during the economic downtown,and their R&D investment is also more counter-cyclical.Fourth,this chapter finds that firms with higher R&D investment levels during the economic downturn have more productive investment and fixed asset investment.These findings indicate that the reason for the countercyclical changes in China's R&D investment is the government support,not the opportunity cost hypothesis.The fifth chapter empirically tests the mechanism of the economic cycle on the firm innovation efficiency and finds that: first,during the economic contraction,the firm innovation efficiency is higher;second,during the economic contraction,the higher the degree of marketization,the higher the innovation efficiency;third,whether it is the state-owned or private firms,low or high market competition firms,the economic cycle has a significant impact on innovation efficiency.The sixth chapter conducts an empirical test on the mechanism of the economic cycle on the efficiency of R&D subsidies and finds that: first,during economic contraction,the R&D subsidy efficiency is higher;second,in industries with high degree of competition and marketization,the impact of economic cycle on R&D subsidy efficiency is stronger.Third,whether it is state-owned or private firms,the economic cycle has a significant impact on R&D subsidy efficiency.The seventh chapter comes to the conclusion and suggestions.After summarizing the main research conclusions,it draws the theoretical contribution of this paper,points out the future research direction,and gives some inspirations.The main innovations and contributions of this paper are as follows: first,based on the Chinese institutional background,we examine the periodic changes of the R&D investment of Chinese firms and the reasons behind them.We find a new interpretation different from the existing Western theories.The existing literature believes that the reason for the counter-cyclical change in R&D investment is the“opportunity cost hypothesis”(Aghion and Saint-Paul,1998).This paper introduces the government support into the analytical framework of cyclical changes in R&D investment,and finds that the R&D investment in China's firms is counter-cyclical.And the reason is government support.Second,this paper for the first time examined the impact of the economic cycle on the innovation efficiency of Chinese firms.The study found that during the economic contraction,the company's R&D efficiency is higher,indicating that the pressure brought by macroeconomic contraction can enhance the efficiency of firm R&D investment,and the government policy is reasonable to support firm innovation during the economic contraction.Third,this paper finds a developed market has a significant positive effect on the firms innovation efficiency.This has shed light on the importance for further understanding the role of the government and the market in firm innovation,optimizing the innovation system in China,and improving the implementation effect of the R&D support policy.