Peer Effects in R&D Investment Policy: Evidence from China

Using a typical linear model on a sample of listed firms in China over a period of ten years (2006-2016), this study empirically attempts proving how peer effects influence corporate research and development (R&D) investment decision. The study goes further to demonstrate that peer effects play a significant and critical role in determining corporate R&D investment policies, and by extension the more important determinant than traditional firm-specific factors. After dealing with endogeneity bias and conducting further robustness checks, the above conclusions were valid in this study. It has been theorized in contemporary research that both information and market competition are the main channels through which one can best appreciate peer effects and that firms with weak information acquisition ability and in highly uncertain or competitive environment are more likely to be affected by peer groups. We also find evidence that a firm’s R&D investment status relative to its peer firms will affect its R&D investment decision. Moreover, the direction of peer effects follows the law of imitation. Thus, firms are more likely to imitate those peers who share similar characteristics. Yet, leading firms and state-owned enterprises (SOEs) are exceptionally different as their R&D decisions are sensitive to both peer-followers and non-SOEs respectively.