A Study On The Effect Of Macroeconomic Fluctuation On The R&D Investment Of The Listed Companies

Chinese economy has been growing rapidly since reform and opening up, however, the disadvantages of the old economic model has become more apparent. China is accelerating the structural reforms, switching to innovation-driven model of development from productive factors and investment-driven model of development. The New Normal of Chinese economy brings the opportunities of economic structural transformation and optimization. Domestic expenditures of R&D increase rapidly and more and more firms seek to do excellent business bigger through technique innovation, which enhances the demand of R&D financing. Nevertheless, the macroeconomic uncertainty and risks have increased due to the internal and external complex factors after the global financial crisis. My doctoral dissertation focuses the study on the effects of macro economic fluctuations on firm’s innovations and tries to reveal the mechanism of the relationships among macro economic fluctuation, financing constraints and R&D investment of China’s listed companies in order to provide theoretical explanations and empirical evidence for the research on the relationship between macroeconomic conditions and R&D activities from a new perspective.The study of this dissertation is on basis of financing constraints hypothesis, firm’s R&D investment theory, the business cycle theory, the innovation theory and research achievements of relationships between economic fluctuations and economic growth. The methods of this dissertation are combination of theoretical analysis with empirical analysis, combination of descriptive analysis with quantitative analysis and combination of institutional background analysis with current situation analysis. The innovation of study lies in three aspects: 1.Measuring the fluctuation of macro economy since the reform and opening up from two dimensions——business cycle fluctuations and macroeconomic uncertainty, which overcome the shortcomings of previous research that is too simple in defining and considering the macroeconomic fluctuation. And I think it is very necessary for comprehensively grasping the essential characteristics of macroeconomic fluctuation in China and its effects on the innovation performance of enterprises. 2. Applying all listed companies data and Innovation-oriented listed companies data to test the periodicity of firm’s R&D investment in business cycle other than in microeconomic cycle. 3. Estimating the effect of macroeconomic uncertainty on heterogeneous firm’s R&D investment as well as the relationships between financial constraints and R&D investment-cash flow sensitivity.The main study is divided into three parts. The first part is the analysis and measure of macroeconomic volatility in China. In my opinion, macroeconomic fluctuation should be divided into two dimensions. The first dimension is the business cycle fluctuation; the second one is macroeconomic uncertainty. For the private sector, the two dimensions together constitute complete information set of macroeconomic conditions. It is incomplete and biased to the study of the macroeconomic conditions to considering only one of them.Using BP filter and HP filter to measure business cycle fluctuation as well as GARCH model to measure macroeconomic uncertainty since China’s reform and opening, this dissertation reveals recent characteristics of economic fluctuation, that is, on the one hand, the economic cycle lasts longer, but amplitude of business cycle has decreased, particularly in the fifth round of business cycle beginning in 2002; on the other hand, the volatility frequency and macroeconomic instability have increased.The second part firstly comments the adjustments and changes of listed companies’ financing system in China and investigates listed companies’ financing structure and R&D investment. The results show that: for the listed companies as a whole, R&D investment fluctuates even more than the capital investment does and smoothing feature of R&D investment is not obvious. There are significant differences of R&D input among different years, especially in the R&D intensive sectors.The second part then discusses and explains the relationships between financing constraints and firm’s R&D investment theoretically. Because of capital market imperfection and asymmetric information, firms that can not finance their investments as much as possible must balance between external financing and internal financing in order to minimize the financing cost. The hypotheses of financing constraints suggests that several factors such as imperfect capital market, asymmetric information, moral hazard and agency problem makes external financing costlier than internal financing.The R&D investment is more different from capital investment for manufacturers. R&D activities need special assets, which usually involve commercial secrets and are more like lemon markets, causing firm can’t provide enough tangible assets as collateral as fix asset investment can. Furthermore, R&D investment is high-risk with high-reward long-term investment whose value of investment is very difficult to accurately assess. Consequently, the financing of R&D project has the following basic features: 1. relying highly on internal funds, shown as high R&D investment-cash flow sensitivity. 2. Blockages in debt financing because of risks of financial distress. 3. Equity financing playing an important role during particular developing stage of the high-tech enterprises.The third part is about the analyses and empirical test of the effects of the two dimensions of macroeconomic fluctuations on R&D investments for all listed companies samples and innovation-oriented ones. I test the periodicity of listed companies’ innovation investment through cyclical component of GDP and industrial added value from BP filter and HP filter trend decomposition as proxy variables of business cycle and test the influence of macroeconomic uncertainty on their R&D expenditure and R&D investment-cash flow sensitivity through the conditional variance of CPI and amplitude adjusted CLI series estimated from GARCH model. The estimation methods are tobit regression, random effects panel regression and multiple linear regression.This dissertation draws the following conclusions through theoretical and empirical analysis:1. Financing constraints play more dominant role in determining the periodicity of domestic listed companies’ R&D investment than the policies, externality of R&D, market structures and opportunity cost do. During 2006-2012, the R&D investments of the listed companies generally show pro-cyclical and the pro-cyclical degree of companies with high financing constraints is 31 percent higher than those with low financing constraints. For innovation-oriented samples, the high level of financing constraints shifts counter-cyclical R&D investment to pro-cyclical R&D investment. Moreover, the high level of financing constraints makes R&D investment of such companies more sensitive to business cycle.2. The reaction of companies’ innovation investment to their sales shock is ultimately subject to macroeconomic fluctuation. It is the stronger motivation of innovation, policies to encourage innovation and the issuance of new shares other than loan which finances domestic frim’s R&D projects that cause the increase in their R&D investment in upturn could offset for the fall in R&D investment in downturn.3. The increasing macroeconomic volatility and risks delay current R&D investment of enterprises for overall listed companies, most sectors and innovation-oriented ones. Although large and State-Owned companies can rely on the favorable conditions to alleviate the financing constraints, but macroeconomic uncertainty would make they overestimate the value of investment opportunity and make they prefer “waiting for” to invest at once by increasing the uncertainty of returns from investment. Small and non State-Owned companies have to cut down R&D investment mainly because they would encounter more serious financing resulted from increasing macroeconomic uncertainty.4. For innovation-oriented companies, R&D investment-cash flow sensitivity would increase by 34.78 percent or 43.82 percent when macro economic volatility measured through CPI and amplitude adjusted CLI rises by 100 percent respectively, in addition, the increasing macroeconomic uncertainty makes R&D expenditure more sensitive to cash flow for non-state owned ones and SMES while the effect is not significant for those sample groups with low degree of financing friction, such as SOES and large ones.The policy implications from above conclusions are clear. In my opinion, macro-control policy should focus on reducing macroeconomic uncertainty and risks hindering innovation of enterprises and economic transformation, and policies encouraging innovation should be differentiated to enterprises according to their different financing terms, besides, it is necessary to provide more equity financing for innovation-oriented enterprises.