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Should Firms in Emerging Markets Invest in R&D? Evidence from China’s Manufacturing Sector

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  • Dachen Sheng

    (Department of Business and Economics, International Christian University, 3-10-2 Osawa, Mitaka 181-8585, Tokyo, Japan
    International College of Liberal Arts, Yamanashi Gakuin University, 2-4-5 Sakaori, Kofu 400-8575, Yamanashi, Japan)

  • Heather Montgomery

    (Department of Business and Economics, International Christian University, 3-10-2 Osawa, Mitaka 181-8585, Tokyo, Japan)

Abstract

Analyzing micro-level firm data from the Chinese manufacturing sector, this study provides compelling evidence that firms in emerging markets that invest in research and development (R&D) for product differentiation significantly increase firm performance as measured by market power, profitability, and earning quality. Privately held (non-state-owned), mid-size, Shenzhen exchange-listed firms experience the largest boost to firm performance when they invest in research and development. However, analyzing the contribution of R&D investment to firm market value, we reveal that while R&D investments are valued by institutional investors, the potential for investment in R&D to boost firm performance is not recognized by individual investors, who dominate Chinese financial markets. This finding suggests that managers may under-invest in R&D if equity compensation comprises a large share of the overall compensation package.

Suggested Citation

  • Dachen Sheng & Heather Montgomery, 2022. "Should Firms in Emerging Markets Invest in R&D? Evidence from China’s Manufacturing Sector," JRFM, MDPI, vol. 15(11), pages 1-17, November.
    • Handle: RePEc:gam:jjrfmx:v:15:y:2022:i:11:p:517-:d:965167
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    References listed on IDEAS

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