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Role of ownership structure in firm R&D investment decision: Evidence from

Chinese high-tech industry

Conference Paper · July 2017

DOI: 10.1109/IEIS.2017.8078624

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 Role of Ownership Structure in Firm R&D
Investment Decision: Evidence from Chinese High-
tech Industry
Muhammad Usman*, Shufang Xiao, Rana Umair Ashraf, Fenni Lian
School of Management and Economics
Beijing Institute of Technology
Beijing, China
usman@bit.edu.cn
Abstract—This empirical study investigates the influence of
institutional and managerial ownership structures on firms’
R&D investment decision and also moderating influence of state
ownership among their relationship. We collect the data of 244
firms for the period of 2009 to 2015 from Chinese high-tech
industry. We applied the fixed effect panel data model regression
to test three hypothesis of the study. Empirical results of this
study show that ownership structures such as institutional and
also managerial have negatively and significantly influence on
firm R&D investment. Furthermore, state ownership has positive
moderation role in relation of institutional ownership with firm
R&D investment while no moderating effect of state ownership in
relationship among managerial ownership and firm R&D
spending decision. This study will helps the policy makers to
understand the various ownership structures effect firms’ R&D
investment decisions in Chinese high-tech industry.
Keywords—institutional ownership; managerial ownership;
state ownership; R&D investment; high-tech industry
I. INTRODUCTION
R&D investment is a vital issue and a key factor for firm
performance. As growing importance and worldwide
recognition of extensive benefits of R&D activities, Chinese
firms also moves towards innovation strategies and allocate
more investment in R&D projects. Regarding different
contrasting research results, firstly this study suggests and
investigates the relationship of institutional and managerial
ownership structures with firm R&D investment. Especially in
an emerging economy, institutional structure has an impact on
firm performance through mechanism of decision making and
choices of different strategies [1]. Currently institutional factor
as ownership structure gains scholarly attention in the relation
of firm innovation policy. China has various kinds of
ownership structures as state and non-state-owned enterprises
known as SOEs and non-SOEs respectively. In china state-
owned enterprises have different orientation of strategies as
compare to non-state-owned enterprises, how they designed
corporate governance system and utilize resources for R&D
investment [2]. Thus, secondly this study examines the
moderating role of state ownership in relationship of
institutional and managerial ownership with firms’ R&D
investment.
978-1-5386-0995-8/17/$31.00 2017 IEEE
Empirical results of our research show that institutional and
also managerial ownership structures negatively and
significantly influence on firm R&D investment. Furthermore,
state ownership has positive moderation role in relation among
institutional ownership of firms with R&D investment of firms
while there is no moderating effect of state ownership in
relationship among managerial ownership and firm R&D
investment. So, this study contributes in the literature by three
ways. First, this study first time examines the different
ownership structures effect on firms’ R&D investment in
Chinese high-tech industry. Second, this study investigates the
moderating role of state ownership. Finally, this study will
contribute in the literature of emerging economy such as China.
Rest of the paper is designed as that second part is related
to literature review and study hypotheses, third part is about
research design, fourth part explains the empirical results of the
study and final fifth part presents the conclusion.
II. LITERATURE REVIEW AND HYPOTHESES
Ownership structure is one of the key factors to determine
corporate governance of a firm [3]. Most of the previous
literature examined the effect of various kinds of ownership
structures on firms’ performance, earnings management and
stock market reactions [3]. But only few empirical studies
investigate the relationship of different ownership structures
with firms’ R&D expenditures [4]. For instance, few studies
examined role of institutional ownership in firm R&D
investment. Our study fills such gap by inspecting the impact
of institutional ownership, top management team ownership
and state or non-state ownership structure on firms’ R&D
investment decision in China’s A-share listed firms of high-
tech industry.
A. Institutional Ownership and Firm R&D Investment
In recent decades, institutional investors emerged as very
powerful ‘blockholders’ to effect positively on firm
performance through discipline and monitoring of corporate
managers and also influence firm strategy formulation about
R&D investment and diversification [5]. Although there is
previous research about effects of institutional ownership over
firms’ R&D strategy, it is extensive but still not conclusive [6].
As most of the researchers found positive effects of the
institutional ownership on firm R&D expenditure [7].
Whereas, in US and UK short-termism kind of institutional
ownership is also exist, which has negative impact on firm
R&D investment [8]. So, institutional investors have different
objectives and can reduce corporate R&D. Other than these
findings, in comparison firms of institutional ownership with
dispersed ownership; it was found no significant influence of
blockholders on firm R&D strategy [9]. In this situation, that
will be very interesting to test influence of institutional
ownership on firms’ R&D investment in transitional and
emerging economy such as China, where ownership structure
and corporate governance conditions are very different from
developed economies. Thus, based on previous literature we
propose in our study the following first hypothesis.
H1: Institutional ownership structure significantly influence
firms’ R&D investment.
B. Top Management Team Ownership and Firm R&D
Investment
Top management team (TMT) ownership is also known as
insider or managerial ownership. Most of the previous research
on agency theory focused on managerial ownership to mitigate
agency cost and to enhance firm performance [10]. In contrast,
this study inspects the effect of managerial ownership on firms’
R&D investment. Top management will always reluctant to
spend resources in R&D strategy because innovation projects
are long-term and high risk of failure which effect firm short-
term profit returns [11]. Thus, there will be a high risk of
immediate employment lose due to risky R&D projects.
Firm financial performance based on its evaluation and
control system such as rate of investments’ return, so
management more likely of behavior to select short-term
projects rather than long-term innovation projects which may
harm current year profitability [12]. Several researchers argued
that management focus more on to meet investors’ expectations
of stock prices thus such short-term approach of stockholders
may lead management to short-term horizon and as a result top
managers will reduce R&D investments [13]. Thus, based on
prior literature we expect and prose the following hypothesis.
H2: Top management team ownership structure has
negative influence on firms’ R&D investment.
C. Moderating Role of State Ownership
Government or state ownership positively influences firm
performance both in case of developed economies, as well as
transitional or emerging economies [14]. In China there are two
main categories of ownerships which are known as state-owned
enterprises (SOEs) and non-state-owned enterprises (Non-
SOEs). In transitional economies like China, governments play
an important role of promoting innovation strategies in
different industries. Broad and extensive government policies
and long-term objectives encourage firms’ innovation
strategies [15]. For instance, in China state-owned enterprises
have various incentives and direct access to key infrastructure
resources that support firms’ innovation strategies [15].
Chinese state-owned enterprises actively pursue government
science and technology (S&T) policies [16]. Currently,
Chinese government extensively introducing a series of market
reforms to promote investment structure and to encourage
institutional investors for industrial innovation.
Moreover, in China ownership under state exhibits lagged
positive impacts on firm innovation performance [17]. So,
based on prior research, our study argument is that the state
ownership could play a role of moderation in relation among
institutions and managerial ownerships impact on firm
innovation. Our argument is based on two reasons. First, SOEs
in China have many advantages of utilizing R&D resources
due to direct political connections, easy access of government
financing, distribution channels, tax credits and various other
government subsidies [18]. Second, almost all Chinese
research institutes and universities are managed and controlled
by government, so such linkage of research institution with
SOEs encourage and support institutional and managerial
ownerships firms to enhance their investment in firms’ R&D
projects [16]. Thus, our study proposes the following third
hypothesis.
H3: State ownership positively moderates the influence of
institutional and top management team (TMT) ownership on
firms’ R&D investment.
III. RESEARCH METHODOLOGY
A. Data and Methodology
To test our study hypotheses, we select the A-share listed
firms at Shanghai and Shenzhen stock exchanges. We collect
the data from 15 different kinds of high-tech industries as
defined by the prior researchers and ‘China Securities
Regulatory Commission’ (CSRS) report. We used two main
Chinese data bases, named as China Stock Market &
Accounting Research (CSMAR) and Wind to collect our
required variables data of the study for the period of 2009 to
2015. Our study does not include high-tech firms belong to ST
and *ST because these firms have special accounting
treatment. We also exclude the firms which has yearly missing
data. Thus, finally we get the balanced panel data of 244 high-
tech firm with total 1708 (2009-2015) yearly number of
observations data. Our data is a balanced panel so follow panel
data analysis techniques. There are two basic panel data models
fixed effect and random effect. We use the Hausman test to
choose the one appropriate model. Hausman test value 19.90
(0.0058) is significant at 1% level of significance. Thus, we
reject and cannot accept null hypothesis, so we select and
accept alternative hypothesis which is that fixed effect model is
an appropriate model for regression analysis. We use the
Stata.12 version for performing our data analysis.
B. Regression Models and Variables of the Study
We have developed five equations models to test influence
of institutions and managerial ownerships on firms’ innovation
and the moderating role of state ownership. First three
equations used to test H1 and H2 while fourth and fifth
equations test the H3. The empirical research models of this
study are as follow:
RD = α +β1 SOF +β 2 CF+β3 FP +β4 GRW+β5 LEV +β6 AG
+β7 IDM +β8 YDM +ε (1)
RD = α +β1 IOWN+β2 SOF +β3 CF+β4 FP +β5 GRW+β6
LEV +β7 AG +β8 IDM +β9 YDM +ε (2)
RD = α +β1 IOWN+β2 MOWN +β3 SOF +β4 CF+β5 FP +β6
GRW+β7 LEV +β8 AG +β9 IDM +β10 YDM +ε (3)
RD = α +β1 IOWN+β2 MOWN +β3 STOWN +β4 SOF +β5
CF+β6 FP +β7 GRW+β8 LEV +β9 AG +β10 IDM +β11 YDM
+ε (4)
RD = α +β1 IOWN+β2 MOWN +β3 STOWN
+β4IOWN*STOWN +β5 MOWN*STOWN +β6 SOF +β7
CF+β8 FP +β9 GRW+β10 LEV +β11 AG +β12 IDM +β13
YDM +ε (5)
Independent variable: Research and development (RD) =
Firm current year research & development (R&D) expenditures
are divided by firm total sales. Dependent variables:
Institutional ownership (IOWN) = Percentage of firm shares
under the ownership of institutional investors. Top
management team ownership (MOWN) = Percentage of firm
shares under the ownership of top management team of the
firm. Moderating variable: State ownership (STOWN) =
TABLE I.
Dummy variables equal to 1 in case of firm is owned by state
or then zero otherwise. Controlling variables: Firm size (SOF)
= Log value of firm total assets. Firm profitability (FP) = Firm
total annual sales divided by total assets. Growth opportunities
(GRW) = Current fiscal year ratio of market over book equity.
Leverage (LEV) = Firm total liabilities at its book value
divided by total firm’s assets. Firm age (AG) = Number of total
years since the firm is performing operations in industry.
Industry dummies (IDM) = Dummy variables are created for
controlling industry effect. Year dummies (YDM) = Dummy
variables are created for controlling different years effect.
IV. RESULTS OF DATA ANALYSIS
A. Descriptive Statistics
Table I explains our study descriptive statistics such as
mean values, standard deviation values and correlation of all
key variables of the study. As all values are lower than 5
which meets the minimum standard of that there is no problem
of multicollinearity issue in this study variables.
SUMMARY STATISTICS AND CORRELATION

Descriptive Statistics and Correlation Analysis

Variables
Obs. Mean SD 1 2 3 4 5 6 7 8 9
1. RD 1708 7.559804 11.39422 1

2. IOWN 1708 37.5179 22.45323 -0.0695 1

3. MOWN 1708 1.863159 7.383577 -0.0482 -0.0015 1

4. STOWN 1708 .3811475 .4858109 -0.0865 0.3466 -0.0103 1

5. SOF 1708 9.486264 .610796 -0.0681 0.3586 -0.0323 0.3127 1

6. FP 1708 47.19891 19.46919 -0.1493 0.1594 0.0170 0.2005 0.0749 1

7.LEV 1708 38.64881 21.93179 -0.0989 0.2272 -0.0160 0.4031 0.4852 0.2774 1

8.GRW 1708 310.5702 296.3426 -0.0377 0.0866 0.0073 0.0728 -0.1571 0.0853 0.0887 1

9.AG 1708 14.42974 4.595697 -0.0324 0.1234 0.0271 0.1725 0.1386 0.1315 0.2344 0.0283 1
Note: The ***, ** and * represents level of significance at 1%, 5% and 10% respectively

B. Regression Results ownership with firms’ R&D investment while there is no

Table II shows the five different regression models results.
In first model we enter all the controlling variables including
industry and year dummy variables. There is 19.96% predict
power of the first model. In second model we enter the
institutional ownership variable along with all controlling
variables. It proves our first hypothesis that institutional
ownership significantly influence on firms’ R&D investment
but this effect in our study is negative. The overall predict
power of the second model is increased from first model as its
R-square value is 20.17%. In third model we enter the
institutional ownership with managerial ownership variables
along with all controlling variables. It proves our second
hypothesis that managerial ownership significantly and
negatively effect on firms’ R&D investment.
The overall predict power of the third model is increased
from first and second models as its R-square value is 20.62%.
In fourth and fifth models of the study, we test the moderating
impact of state ownership. Results show that state ownership
has positive moderation role among the relation of institutional
moderating effect of state ownership in relation between
managerial ownership and firms’ R&D investment.
V. CONCLUSION
This study presents the importance of different ownership
structures influence on firm innovation decision. Our study
main focus is institutional and managerial ownership structures
effect over the investment decision of firms’ R&D. We conduct
this empirical study on Chinese high-tech companies and
explore the ownership structures influence on firm innovation
strategies. Empirical results findings explain that the
institutional and also the managerial ownership structures are
significantly and negatively influence on firms’ R&D
investment. State ownership plays positive role of moderation
in relation among the institutions’ ownership of firms and
firms’ R&D investment while no evidence of moderating
effects of state ownerships among the connection of managerial
ownership of firms with firms’ R&D investment.
R&D investment planning in firms is associated with many
different issues such as these kinds of investments are
associated with high level of risks, long term and huge
financial resources are required. Most importantly, R&D
investment decisions can detrimentally influence the current
year of profit performance of the firm. On the basis of these all
issues the different ownership structures of firms have different
approaches and behavior about such risky and also long-term
investments. Our study proves these theoretical findings by our
experimental testing of study hypotheses and shows in different
kinds of ownership structures firms’ management attitude and
behavior are different about R&D investment decisions. In
case, China’s state and non-state categories of enterprises are
also important to influence relationships among ownership
structures and firms’ decision about R&D.

TABLE II. REGRESSION RESULTS

Regression Results of Five Models

Variables
Model 1 Model 2 Model 3 Model 4 Model 5
Constant -1.60388 -4.834995 .7043845 4.897301 4.155852

SOF -.0556113 * 1.752878** 1.737193* 1.76884** 1.722008*

FP -.0556113*** -.0557638*** -.0541691*** -.0537093*** -.0543017***

LEV -.0199389 -.0160982 -.0140228 -.016019 -.0140968

GRW .0005846 .0006568 .0006666 .0007005 .0005999

AG -.2883511 -.3030756 -.7687697 -1.107333 -.9394975

IOWN -.0376283* -.0365109* -.0347159* -.0556553**

MOWN -.1022973*** -.1026895*** -.0914817**

STOWN -2.097927 -4.815854

IOWN*STOWN .0697257*

MOWN*STOWN -.0312726

IDM Yes Yes Yes Yes Yes

YDM Yes Yes Yes Yes Yes

R-Square 0.1996 0.2017 0.2062 0.2068 0.2084

Note: The ***,**,* show level of significance at 1%, 5% and 10% level of significance
First, our study findings contribute in the literature about
how the role of different ownership structures can be
influenced the firms’ R&D investment decisions and how
moderation role plays by the state ownership. Secondly, our
study will be helpful for policy makers in China to understand
the various ownership structures and their influence on the
decision of firms’ R&D investment in Chinese high-tech
industry. Our study about empirical investigation of such
relation limited to the three kinds of ownership structures only.
Thus, future studies can include foreign investors’ ownership
impact on firms’ technology innovation.
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