The Relationship Between R&D Investment And Its Financing For China's GEM Enterprises

The advance of science and technology play an important role in the progress of human society. The idea of "Made in China 2025" suggests that our government has been increasingly aware that technological innovation will enhance the core competitiveness of the country's comprehensive national strength. But there is still a big gap between the overall R & D investment levels of China with that of the developed countries. Corporates are the main body of market-oriented economy and innovative activities, whose R & D investments will not only affect their own competitiveness, but also have a decisive influence on China's technological progress and long-term sustainable economic growth. In this situation, improving the financing environment for innovation, thereby reducing its financing costs, can effectively promote enterprise R & D investment.R & D investment, due to its high risk, will face high external financing costs, making it depend on, or even limited to the company's internal financing. Meanwhile, the two way external financing of enterprises, external equity financing and debt financing are different in some aspects. For debt financing, it has collateral requirement and can bring companies debt service pressure, so that companies may be more inclined to use external equity financing to provide financial support for its R&D investments. Because of the dominant position of banking in the financing system, the government establish the GEM to ease the external equity financing of grow-ups in high-tech industry. In addition to this, the government provides subsidies to the company, in order to give financial support directly to companies for their R&D investments. But the real effect of subsidies for companies'own innovation activities are not sure. That is to say, government subsidies may have moderating effects on the relationship between company's financing and R&D investments.Under the guidance of the above theories, this paper reviews some literatures related to the innovation R&D investments, and found that the current research on this fields focused on the following four aspects:(1)the relationship between R & D investment and its internal financing;(2)the relationship between R & D investment and capital structure;(3)the relationship between government subsidies and R & D investment (4) other internal and external environmental factors that influence company's R&D investments decision. Depending on funding streams, research focused more on the R&D investments internal financing cash flow sensitivity to investigate the existence of financial constraints, but ignore the study of the external financing. Meanwhile, research on capital structure failed to distinguish internal and external financing, and ignore the influence of added funds. Besides, there is little literature that focus on the moderating effects of government subsidies on company's financing, and even much less about GEM. So what is the financing mode of GEM companies'R&D investments? Can government subsidies stimulate GEM companies'R & D investment? It's worth paying attention to.Depending on this, this paper try to do empirical research to examine GEM companies'financing modes of R&D investments from the added funds aspects and the direct and moderating effects of government subsidies on GEM companies' R&D investments. Firstly, this paper introduces the concept and characteristics of innovation and R & D Investment, and the classical theory about the relationship between investment and financing, including MM theory, asymmetric information theory and the pecking order theory. Based on the external financing and R&D investments situations GEM companies face, this paper builds hypothesis in the following order:(1) Internal financing have no effect on GEM companies' R & D investments;(2) Compared with debt financing, GEM companies are more willing to innovate depending on the external equity financing; (3) Government subsidies will have direct positive and moderating effect on companies' R & D investments.Empirical study models of this paper based on investment-cash flow sensitivity model developed by FHP (1988). FHP (1988) assessed future investment opportunities with Tobin's Q, and use regression coefficient of internal cash flow to measure the external financing constraints faced by company. And this model has been widely used in the field of R & D investment and its financing. Therefore, this paper uses the company's internal and external equity financing, long-term debt financing and government subsidies as the explanatory variables to examine the GEM companies R&D financing modes, and explore the role of government subsidies using multiplicative interaction term. Next, based on the empirical evidences of 2009-2014 GEM companies, this paper use unbalanced panel data and Petersen (2009) two-way cluster method to estimate the coefficients of the models. Apart from this, this paper check the robustness of the models using variables redefining and IV.The main conclusions of this study are as follows. (1) GEM companies, lack of internal financing and easing of external financing, do not rely on its internal financing to do R & D investment. (2) External and equity financing long-term debt financing of GEM companies can both have a positive impact on its R & D investment. But contrary to the hypothesis in this paper, because of the high capital costs of long-term debt financing, the GEM companies are more inclined to use the funding from long-term debt financing to do R & D investment, in expectation of the high return from risk-taking to make up for the high cost of debt financing. But for external equity financing, the attitude is more conservative. (3) Government subsidies have a positive impact on GEM companies' R & D investments, more significant than external equity financing and long-term debt financing. (4) Government subsidies have a positive moderating effect on the relationship between external equity financing and R & D investment, for the government subsidies can reduce the average cost of funds so that R & D investment becomes profitable; however the moderating effect on the relationship between long-term debt financing and R & D investments are negative. Government subsidies have a "substitution" effect on the long-term debt financing. Because the long-term debt financing of GEM companies are almost bank loans. When companies get more government subsidies, it suggests good relations between the government and company. And when the banking system and government are close related, company can get more bank loans, which duplicate the availability of funds. So companies tend to replace long-term debt financing with government subsidies to funding R & D investment.In conclusion, this paper argues that the pertinence of supportive policies should be thoroughly considered when broadening the external financing channels for growing firms, and the government should use incentives to motivate enterprises. Therefore, the government, as a policy-maker and the executive, would be able to stimulate innovative firms and the market, thus efficiently accelerating the technology development of China.There are several innovative points in this paper:First, as the previous literatures mostly focused on the impacts of the company's internal financing on R & D investments, and the policies are focusing on the source of external financing for those companies; this study provides empirical evidence for the relationship of external financing and corporate R & D investment from the perspective of firms' funding tendency. Second, while the literatures focused on the impact of financing structure on innovative R & D investments, this paper compares the outcomes of different financing sources considering the funding incremental. Third, this article regards government subsidies as a special financing method to be compared with other sources of financing. Based on current funding problems, this paper studies those subsidies' regulating effects on other financing methods. Hence, this paper could serve as a reference for making a niche targeted supportive policy for innovative companies.This study also has some shortcomings. First, due to the short time period of GEM, the sample's time horizon is limited, so the model only introduces one time lag as an explanatory variable. Therefore, the model does not sufficiently investigate the relationship between the lagging impacts of different financing sources (especially large-sized equity financing) on firms'R&D investment and innovative researching activities. Second, while this paper regards all government subsidies as a special financing resource in the researches; there are a range of government allowances on innovative R & D investments, such as project funding, innovation funds, industrial funds, financial subsidies, patent awards, product rebates and loan's interest subsidies, etc., and whether different kind of subsidy would yield different effects is not investigated.