Study On R&D Decision-making Influencing Mechanism Of Private Enterprise Based On Managerial Political Connections

Lack of R&D investment is the biggest obstacle in Chinese private enterprises’ transformation and upgrading. In this paper,the author believes that when revealing private enterprises’ R&D investment decision making mechanism and the factor that influence it, the political connections, the managerial cognitive bias, especially the managerial overconfidence and overoptimism should be taken into account. Specifically, in order to obtain access to external scarce resources that held by government, the managers of China’s private listed companies are open to establishing political associations with the government. Meanwhile, current research has shown that managers always display cognitive bias when making decisions, and overconfidence and overoptimism are thought to be the most robust findings in various forms of cognitive bias. What’s more, private firm R&D investment decision making, to a large extent, is impacted by the political connections and managerial cognitive bias. What’s more, managerial cognitive bias always influence enterprises’ resource allocation, which may furthermore influence the relationship between management’s political connections and the firm’s R&D investment decision making heavily.This paper brings the manager’s political connections, cognitive bias, and R&D intensity into a unified theoretical framework, and investigated the combined impact of executive political connection and managerial cognitive bias on private firm R&D intensity. Firstly, this paper explored the influence of political connection on private firm R&D intensity through mathematic model and empirical method. Then, using data from private listed companies in 2009 and 2011, we find that the executive’s political connection has a positive effect on private firm R&D intensity. This paper examined the the influence of managerial cognitive bias on political connection and private firm R&D intensity, and the adjustment of that on political connection and private firm R&D intensity empirically. At last, based on the conclusions above and the managerial experiences, this paper puts forward suggestions on how to improve private firm R&D intensity from the perspective of external relations mechanism and internal bounded rationality for the microcosmic, middle and macroscopic level. The conclusion show that:First, the executive’s political connection has a positive effect on private firm R&D intensity. According to prior research, a manager’s political connection can bring abundant resources to the firm. However, this paper states that a manager’s political connection can bring in resources, but it may restrain the firm’s technological innovation motivation at the same time, which impedes the firm’s long-term growth and development.Second, the managerial overconfidence has a significant and negative correlation with private firm R&D intensity whereas managerial overoptimism shows a reverse effect. Existing literature primarily considers overconfidence and overoptimism as having consistent impacts on a firm’s behaviour, and does not distinguish between the two forms of managerial cognitive bias. However, there is a significant difference between overconfidence and overoptimism, when considering their direct impact, as well as a nonlinear influence on the relationship between management’s political connections and the firm’s R&D intensity.Third, managerial cognitive bias significantly moderates the political connection and private firm R&D intensity, but the degree of the moderation is non-linear. That is to say, as the degree of cognitive bias increases, the overconfidence or the overoptimism has accelerated positive or negative moderation, respectively. This result indicates that political connections provide a convenient way for private firms to obtain access to external scarce resources, but whether and how many of these resources are invested into R&D greatly depends on the manager’s psychological characteristics.This paper not only presents evidence of the duality of political connections, and expands upon existing literature about managerial cognitive bias in enterprise behaviour, but also reveals the psychological moderating mechanism in the relationship between political connections and R&D intensity, and provides a reference for political and economic reform in countries with transition economies and emerging market economies.