Incentives, Competition, And Firm R&D Behavior

Innovation is the primary means to improve our firms’ competitiveness which can not only reduce the production costs and increase productivity, but also enable firms to gain an advantage position in the fierce market competition. However, on the whole the capability of independent innovation is not strong for executives’ unwillingness to innovate. Therefore, consummating internal and external corporate governance mechanisms to improve executives’ willingness to innovate and enhancing independent innovation capability are important theoretical issues.Based on the perspective of incentives and competition, we discusses the nonlinear relationship between incentives, competition and R&D behavior as well as their interaction relationship. Then we can analyze the deep influence mechanism between these two kinds of mechanisms and R&D behavior. First of all, in order to comprehensively analyze the mechanism of incentive and competitive to executives’ willingness to innovate, we set up a new principal-agent model by amending the classic principal-agent model assumes, which competition factors have been taken into account. Secondly, based on theory analysis we presented our empirical hypothesis and build our econometric model containing nonlinear influence and interaction of variables. Thirdly, for the sake of avoiding the endogeneity problem, we use2SLS method to estimate the model and seek empirical evidences of the relationship between incentives, competition and R&D behavior. Finally, so as to ensure the robustness of our conclusion, we use relative R&D expenditure instead of R&D expenditure as the explained variables to do robustness test.Our main conclusions are as follows:in a certain range the annual salary incentives can improve R&D expenditure, however a higher level of salary will exert inhibitory effect. Although the relation of equity incentive and R&D behavior was U-shaped, actually equity incentive is not less than zero, so it can only enhance R&D behavior. As the product market, capital market competition intensifying, executives’ willingness to innovate will increase, so as to the scale of R&D expenditure. In all the factors, the interaction of annual salary and equity, the interaction of product and capital market competition, the interaction of annual salary and capital market competition, have obvious interactions.