The Effect of R&D Investments on Market Value of Firms: Evidence from the U.S., Germany, and Japan
Bae, Sung C., Kim, Dongnyoung, Multinational Business Review
ABSTRACT: This paper examines the effect of R&D investments on the market value of firms in the U.S., Germany, and Japan. Specially, this paper investigates the empirical validity of the widely-held economic views that suggest that the stock-market oriented U.S. financial system leads to more corporate myopia and hence to less longer-term investments such as R&D than the bank-oriented German and Japanese firms. Findings include that U.S. firms invest in R&D as much as their counterparts in Japan and Germany; the market places a significant and positive value on R&D investments by U.S. firms, though lower than German and Japanese firms; and there are notable differences among the three nations with respect to several other variables. The overall evidence lends little support to the corporate myopia view on U.S. firms.
This paper explores corporate research and development (R&D) activities in three of the most advanced economies-the U.S., Germany, and Japan. In particular, this paper compares the effect of a firm's R&D investment in creating market value in these three nations. Previous studies have documented that R&D spending has a positive and consistent influence on the firm's market value (see, e.g., Chan, Martin and Kensinger, 1990; Chauvin and Hirschey, 1993; Doukas and Switzer, 1992; and Szewzyk, Tsetsekos and Zantout, 1996) and on its operational and financial performance (see, e.g., Johnson, Busbin, and Pearce, 1999; Kotabe, 1990; Lau, 1998; Mansfield, 1981; and Zif and McCarthy, 1997). The evidence on the effect of R&D investments is, however, limited to U.S. firms. This paper intends to fill this gap by providing evidence on the effect of R&D investments on the market value of firms in Germany and Japan, relative to firms in the U.S.
The study of corporate R&D investment across these three nations is warranted for several reasons. First, the U.S., Japan, and Germany invest the most in R&D of all kinds (Adam, 1996). According to Critical Technologies Update 1994, the U.S. has held a significant position in critical technologies such as biotechnology, environmental technology, and information technology. The U.S. has also seen growth in technologies where it had been lagging, such as scientific instruments, design for manufacturing, and TQM. Germany is a nation of inventors, accounting for nearly half of all European patents. Electrical and electronics are the most intensive research areas to date in Germany, which spends a respectable eight percent of total industry revenues on research each year (Blau, 1994). Compared with the U.S. and Germany, Japan is extremely strong in research into electronics and engineering processes. According to a survey by the Japanese Technology Agency, creating high-value-added products through R&D is a primary focus of business strategies for the majority of Japanese firms; more than 60 percent of the firms surveyed indicate that the relative importance of R&D in their business strategy has increased, despite the recent stringent business environment in Japan (Swinbanks, 1995).
Second, German and Japanese firms may have different characteristics in their R&D activities from U.S. firms. According to Roberts (1995), while German firms are less involved with their customers in carrying out product development than are U.S. or Japanese firms, Japanese firms more frequently regard their top management as highly supportive of R&D efforts. American R&Ds are perceived as overemphasizing product development in contrast to process development.
Finally, both Japan and Germany have been building their technological capabilities and could pose a threat to U.S. competitiveness over a long term. The 1996 issue of Japanese annual White Paper on Science and Technology observed that, while several years ago, Japanese firms considered strengthening basic research and diversification of R&D to be important aspects of their R&D strategy, 81 percent of respondents now cited strengthening of product development in response to needs to be more important, and 48 percent would focus their R&D in specific areas (Wolff, 1995a). …