Economic Policy Uncertainty,Policy Sensitivity And Corporate R&D Expenditure

Ever since the 2008 financial crisis,more and more scholars blame the economic policy uncertainty for delaying the recovery of global economics.Later on,researches on economic policy uncertainty are made possible when Baker et al(2016)constructed the economic policy uncertainty index.Even though economic policyuncertainty itself is a macro-variable,more and more researches begin to probe its effect on firms which plays a micro role in the economy.This paper focuses on the path in which economic policy uncertainty affects corporate R&D expenditure.How economic policy uncertainty would affect corporate R&D expenditure is swayed by two competing theories.On the one hand,real options theory states that firms would tend to keep or even reduce their R&D expenditure based on the fact that corporates are very likely to make expensive mistakes under higher uncertainty.In a word,corporate may be more cautious when uncertainty is higher.On the other hand,modern competitive theory maintains that the game among firms is not a static state but rather a dynamic process.Also,corporates rely heavily on their R&D investment to build core-competitiveness.Therefore,on a dynamic game basis,the contest among firms may urge them to invest more on innovative activities during high uncertainty to get an edge in the following competition.These two polarized conclusions lead us to conduct an empirical research on this question.In the meantime,government grants against high economic policy uncertainty is worth mentioning for two implications:First,government plays an unignorable role in adjusting corporate R&D expenditure under high economic uncertainty,especially in China.Either Industrial policies or government grants policies would greatly affect firms' R&D decision.In addition,such policies are also highly correlated with economic policy uncertainty.Second,there have been continuing disputes over government grants.For example,the industrial policy debate between Yifu Lin and WeiYing Zhang.However,few researches have looked into how different government grant policies would affect different types of firms during different periods.Such statement contains an underlying point that there is no definite good or bad government grant policy but appropriate or inappropriate policy.However,we face the dilemma of conducting research directly between economic policy uncertainty and government grants given the fact that government grants themselves represent policy uncertainty.Therefore,with our constructed policy sensitivity index for every industry,we are able to find out how government grants work on different policy sensitivity company's R&D investment.In order to propose research questions,this paper first peruses and summarizes both domestic and foreign related literature,including economic policy uncertainty and corporate innovation,government grants and corporate innovation.A deduction among these three activities follows based theoretical analysis of related literature.What is worth mentioning is that this paper also divides corporates into two categories-policy sensitive firms and otherwise which is constructed though a regression between economic policy uncertainty and monthly return of the corporate stock.Our theoretical deduction along with policy sensitivity index equips us with our three research questions.Based on our previous theoretical deduction,this paper employs a sample of all listed companies in China's A-share market from 2009 to 2017 to examine empirically the relationships among economic policy uncertainty,government grants and R&D investment.The main findings of this paper are as follows:First,corporates tend to increase their R&D investment during higher economic policy uncertainty.Second,compared with policy insensitive firms,policy sensitive firms tend to invest more on R&D,which to a degree backs up the modern competitive theory.Third,although government subsidy and tax incentives both could stimulate R&D expenditure,government subsidy could significantly bring up R&D investment of policy-sensitive companies but tax incentives have no such function.In sum,this paper empirically examines corporate R&D decision under two competing theory and lend support to the modern competitiveness theory.Meanwhile,this paper divides corporations into two categories,i.e.,policy sensitive and insensitive to picture the difference among firms under high economic policy uncertainty.Furthermore,this paper also broadens the difference in government grants by theoretically and empirically examining how government subsidy and tax incentives affect corporate R&D expenditure under economic policy uncertainty.