Working Capital On The Smoothing Effect Of Enterprise R&D Investment Research

In1997, the famous economist Krugman published "The Myth of Asia’s Miracle" in "foreign affairs", causing a great sensation in the academic and political circles. In this paper, Krugman criticized China’s economic growth only depended on extensive production factors such as labor and capital other than technological progress. Opposite with Krugman’s prediction, Chinese enterprises have experienced a sustained and rapid growth of R&D investment. By2012China’s scientific and technological progress contribution rate of GDP reached52.2%, so Krugman’s "bad mouthing China" collapsed and his theory underestimated Chinese investment in science and technology. However, unlike the R&D input in those western developed countries fluctuates with the economic cycle, the R&D investment has maintained a growth trend in the process of China’s enterprises making innovation development, despite facing financing constraints in different degrees. In order to explore the reason behind this phenomenon and mechanism, this paper examines the smoothing effect of the working capital on enterprise R&D investment.A remarkable feature of R&D activities in China’s enterprises is that our country’s R&D investment is usually done by large enterprises who have financial strength. Therefore, this paper chose281listed corporations on Shanghai and Shenzhen Stock exchange who take ongoing R&D activities as the research sample, collected the2009-2013years of panel data, used Euler equation to characterize corporate R&D behaviors, analyzed the relationship between financing constraints, working capital management and corporate R&D investment by using GMM method. This paper first carried out to test the validity of financial constraints, and the results show that China’s listed corporations indeed face financing constraints when they make R&D investment, and this is due the high adjustment cost and unstable financing sources. Secondly, in the background that enterprises are facing financing constraints, this paper analyzed the influence of working capital on enterprise R&D investment, finding that working capital has significant positive influence on corporate R&D activities, and enterprises can use working capital to smooth fluctuations of R&D activities, so as to maintain the steady growth of spending on research and development. Finally, this paper innovatively introduces the concept of relative degree of financing constraints, use the SA index proposed by Hadlock and Pierce (2009) to quantitatively measure the degree of financing constraints in sample enterprises, and analyses the influence of the enterprises’relative degree of financing constraints on working capital smoothing effect.The results indicate that those enterprises subject to financing constraints strong enterprises are most dependent on working capital to smooth the fluctuations of R&D investment, and the smoothing effect of working capital on R&D investment shows an asymmetry inverted U type. This means that there is an optimal value when enterprises smooth R&D investment through the working capital management, and there is a kind of working capital management strategy, so that enterprises can maximize the use of working capital to smooth the R&D input. This paper provides countermeasures for the enterprise how to avoid financing constraints that appear in R&D investments, provide theoretical support for the enterprises to improve the efficiency of working capital management, suggest the enterprises how to use financial tools in the the government’s reform of the financial system to improve enterprise’s financing ability and how to benefit from the national tax reform and increase enterprise financial integration power, provides policy suggestions on more effective management of R&D investment. In addition, the conclusion of this paper has policy implications on that the State encourages enterprises innovation. In fact, the tax policy has become an important means for the government to encourage enterprises to innovation, and funding direct intervention mode is gradually introduced, so this study helps to understand the significance of this transformation.