Asymmetric information problem and lack of collateral can make R&D investment more susceptible to financial constraints than other investment, especially for young, small and non-dividend-payout firms. During the global financial crisis (GFC) with the reduction on market demand and the collapse of credit and stock markets, R&D intensive firms find raising both internal and external finance a challenge. On a macroeconomic level, R&D activities are likely to be enhanced by financial development as a mechanism of economic growth. However, existing evidence on whether financing frictions limit R&D activities, particularly in non-high tech firms and the effects of the GFC as well as financial development on R&D investment both for high tech and non-high tech firms remain unexplored. Thus, this study attempts to fill the aforementioned gaps.
In particular, this thesis analyses the impact of financial sources on R&D investment in both high tech and non-high tech firms. In particular, two key research questions are answered including:
RQ1: To what extent do sources of finance including cash flow, stock issues and debt issues affect R&D investment during crises periods?
RQ2: To what extent does financial development affect R&D investments?
The study analyses a panel dataset of 8,508 publicly listed U.S. firms comprising 2,965 high tech firms and 5,543 non-high tech firms with a total of 80,945 firm-year observations over the period of 1990-2011. The study is based on the Euler-equation specification using pooled-OLS, firm fixed effects and two-step system GMM regressions.
The thesis documents three key findings. First, the internal finance affects R&D investment in both high tech and non-high tech firms while external finance are only associated with high tech firms. Moreover, this effect is severe among young and non-payout firms compared to mature and payout firms respectively. Second, impacts of the GFC 2007-2008 and internet bubble crisis 2000-2001 on R&D investment in high-tech firms are greater compared to their counterparts (i.e, non-high-tech firms). This evidence is appreciable among young and non-payout in high tech industries. Finally, financial development enhances innovation in both high tech and non-high tech firms, indicating that high tech firms exhibit ease in accessing financial sources compared to non-high tech firms. The results are robust to different sample splitting criteria, model specification, and other crises periods.