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Internal Capital Markets and R&D Investment: Evidence from Korean Chaebols

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  • Seiwoong Hong
  • Frederick Dongchuhl Oh
  • Donglim Shin

Abstract

This study examines how internal capital markets (ICMs) within business groups affect the financing of research and development (R&D) investments, focusing on Korean chaebols. We find that, on average, chaebol-affiliated firms exhibit lower R&D investment – cash flow sensitivity than standalone firms do. We also find that an affiliated firm’s R&D expenditure is significantly positively associated with the net amount of equity capital received from other affiliates but not significantly related to its own cash flow. These findings indicate that ICMs effectively mitigate affiliated firms’ R&D financing constraints. We further find that this financing constraint mitigation is more pronounced during financial crises and for high-tech firms. Finally, we find that, for chaebols, greater ICM effectiveness leads to better innovative performance. Overall, our study highlights the importance of ICMs for promoting corporate innovation via the reduction of R&D financing constraints.

Suggested Citation

  • Seiwoong Hong & Frederick Dongchuhl Oh & Donglim Shin, 2023. "Internal Capital Markets and R&D Investment: Evidence from Korean Chaebols," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 59(8), pages 2493-2506, June.
  • Handle: RePEc:mes:emfitr:v:59:y:2023:i:8:p:2493-2506
    DOI: 10.1080/1540496X.2023.2185095
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    Cited by:

    1. Bo Zeng & Weimin Zhang & Defang Ma & Chenyang Zhang & Xiao Liu, 2023. "The Impact of Group Control on the Effectiveness of Enterprise Innovation: An Empirical Study," Sustainability, MDPI, vol. 15(13), pages 1-15, July.
    2. Defang Ma & Liangwei Li & Yuxi Song & Mengkai Wang & Qiaowen Han, 2023. "Corporate Sustainability: The Impact of Environmental, Social, and Governance Performance on Corporate Development and Innovation," Sustainability, MDPI, vol. 15(19), pages 1-16, September.

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