Discuss about the Research and Development Activities.
Research and development is defined as the activities undertaken by the firms and the industries in order to foster and improve its existing products and services range. This also helps the organisations to introduce newer products in its portfolio as well. Presently the need for investment in the research and development sector has received significant attention from the researchers and the policymakers (Appel et al., 2016). This is because a wide range of empirical studies suggest that investment in research and development helps to achieve economic growth. The theorists who put forward the new growth theory have argued regarding the fact that contributing in the research and development activities would certainly help the organization in long term value creation. In a research report published by OECD pointed out the fact that a one percent increase in the research and development stock would contribute towards increasing the growth of multifactor productivity by 0.13 percent (Becher et al., 2017). Henceforth, it can also be said that investment in the research and development activities is not only important from the aspect of the overall development of the country but also helps in long term survival and growth of the organizations a well.
This paper will focus on determining the key factors that contribute in determining the research and development expenditures of the firms. As pointed out by Choi et al., (2015), organizations specifically the technology intensive industries rely more on the research and development activities in order to obtain competitive advantage and thereby foster in the competitive marketplace. However, it has been observed that firms differ in investing on research and development activities even after controlling the industry, performance ad firm size.
The previous researches available in this context mainly identifies the two main components ownership structure and board size as the key variables for determining the amount investments in the research and development activities. In the light of the previous research works it can be stated that ownership structure in the cornerstone of the corporate governance of an organization (Ntim et al., 2015). In various developed countries like United States and United Kingdom protecting the shareholders is considered as good, firms which are listed publicly are generally identified with a concentrated structure of ownership where it is controlled by a single and large stakeholder group. This type of stakeholders are known as the controlling owner or the controlling shareholder of the company. As the literature suggests there are two different perspective of the relationship between ownership structure and investment in the research and development activities (Meyer and Peng, 2016).
In the context of the agency perspective it can be stated that in case of the family firms the conflict between the owners and managers is minimized. The researchers who have conducted research in this regard have observed that owners possess incentive in seizing or expropriating the minor stakeholders (Matzler et al., 2015). The controlling stakeholder in this case not only control determine the strategies of running the firm but also determine the process of the distribution of profit. Hence, in the agency perspective the controlling owner possesses the opportunity to exploit the entire firm’s profit and thereby control the amount of investment indifferent sectors. The incident of expropriation has also been substantiated by different research works.
On the contrary the stewardship context suggests that unlike agency theory the owners and managers are driven by the high order needs such as the need for self-actualization, growth and achievement (Feng et al., 2018). As a result of this they promote collectivistic behavior as well. The family owner’s reputation and fortune are closely related to the business and hence they have strong emotional investment in the business. Therefore it is quite normal that these approach suggests that the owners are more likely to invest in the research and development activities so as to enhance their business.
The second independent variable as selected on the basis of the previous research work is the board size. It has always been argued that board size can effectively determine the amount of resources needed by a firm. If the organization possesses more that one director it would certainly have a pool of information and level of expertise (Park et al., 2017). On an added notion, a larger board is more likely to possess significant linkage with the external resources which in turn increases the firm’s accessibility to various important resources.
In order to develop and implement improved research and development activities firms are required access to skills, expertise and knowledge (Åberg et al., 2017). Hence a larger board size will help an organization to integrate intellectual knowledge and process valuable information as efficiently as possible and thereby cope with the higher demand of information processing. This also assists the firm in improving the efficient investment decision making process in the context of research and development (Bromiley et al., 2015).
On the basis of the aforesaid discussion the developed hypothesis of this paper is as follows,
The amount of investment in the research and development sector is affected by the board size and ownership structure.
In order to test the hypothesis dataset has been collected from VISION. The excel file contained data regarding all the 42 publicly listed organizations in the main board of London Stock Exchange. It ranged from 2003 to 2011 and it has been observed that the data is a panel data. This means it is the combination of cross sectional and time series data. However, this specific type of panel data is categorized as the unbalanced panel, this is because it does not contain the data for all the years for all the organizations. In order to analyze this type of unbalanced panel data fixed and random effect model has been used and finally the Hausman test is used to identify which test should be accepted. Moreover, the data is analyzed in STATA.
Figure 1: Fixed Effect Model
(Source: Generated by STATA)
The first test that is the fixed effect test depicts the result that probability of board sixe is less than 5% and hence the null hypothesis is needed to be accepted which means that the board size affects the investment on research and development. On the other hand, the other independent variable has been observed to be insignificant as the probability is observed to be higher that 5%.
Figure 2: Random Effect Model
(Source: Generated by STATA)
In the second test that is the random effect test also the board size seems to be a significant variable as the probability is less than 5% and in this case as well the ownership structure has been observed to insignificant.
Figure 3: Hausman Test
(Source: Generated by STATA)
In order to verify which test should we accept, Hausman test has been performed. In Hausman test the null hypothesis is that
Null Hypothesis: The random effect model is true
Alternative Hypothesis: The fixed effect model is true
As the probability is higher than that of the 95% confidence interval the null hypothesis should be rejected and alternative hypothesis should be accepted.
Hence it can be stated that the board size significantly impacts over the investment in research and development while the data suggests that ownership structure is insignificant in this case.
On a concluding note it can be stated that board size is an effective determinant of the amount investment in the research and development sector of an organisation. The secondary research substantiates the fact with a few empirical findings which suggests that if a firm possesses more than one director it is quite evident that it would possess access to more expertise, skills and connections to the external world. This in turn increases the efficiency of the decision making process of investing in the research and development segment. On the other hand, the ownership structure is found to be an insignificant variable in this particular case though other empirical findings have depicted different results.
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