Introduction

Literature review and hypothesis development

Measurement of variables and research design

Empirical results

Conclusions

References

Abstract

Based on R&D investment data from Chinese listed manufacturing firms, this paper examines the effect of R&D spending on firms’ future performance conditional on their strategic positions. We find that firms pursing a product differentiation strategy have more R&D spending than those with a cost leadership strategy. In addition, we document a positive effect of R&D spending on firms’ future performance if they adopt a product differentiation strategy. Meanwhile, for the firms that adopt a cost leadership strategy, the relationship between R&D spending and firm performance resembles an inversed U-shape. Furthermore, we find this inversed U-shape relationship only exists for non-state-owned firms. Overall, this paper provides guidance and useful suggestions on the efficient allocation of R&D resources for Chinese manufacturing firms.

Introduction

Technological innovation is the main driving force of economic growth. As one important channel to generate new technology, the intensity of research and development (R&D) spending is found to be positively associated with firm operating performance and market valuation (Branch 1974; Chauvin and Hirschey 1993; Sougiannis 1994; Eberhart et al. 2004; Armstrong et al. 2006). However, R&D is also associated with risk. Chan et al. (2001) find that R&D intensity is positively associated with return volatility, while Shi (2003) argues that R&D risk dominates their benefits. The optimal level of R&D spending has always been questioned, and becomes even more complicated when the effect of R&D spending varies with firms’ own characteristics (Chan et al. 1990; Eberhart et al. 2004). In this paper, we examine the relationship between R&D spending and firm performance conditional on corporate strategic positions. Rather than focusing on external objective conditions, we emphasize the role that managers’ subjective initiative plays on the effect of R&D spending on firm performance. We follow Porter’s (1980) generic strategies to classify firms into ones adopting a product differentiation strategy and ones with a cost leadership strategy. We first find that firms with a product differentiation strategy have more R&D spending than ones with a cost leadership strategy. Furthermore, we find that the relationship between R&D spending and firm performance is different for these two types of firms. R&D spending is positively associated with future performance for the firms that adopt a differentiation strategy, but the relationship becomes an inversed U-shape for the firms that adopt a cost leadership strategy. Finally, we find that the relationship between R&D spending and firm performance only exists for non-state-owned firms (non-SOEs).