The relationship between R & D and enterprise performance in the

context of organization life cycle.

Cource Name: MGT5329P

Date: 09/2020

Number of words:10829

3.0 Methodology

3.1 Philosophy of research

The philosophical view represents the researcher's systematic view of the world
(Moon and Blackman, 2014:1171). The discussion of philosophy is essentially a
discussion of ontology and epistemology. On the one hand, ontology is a researcher's
view on the relationship between the things existing in the real world and the basic
categories of existence (Hartel, 2003:241). On the other hand, epistemology refers to
the study of knowledge and the process of acquiring knowledge (ibid). There are two
standpoints about epistemology: positivism and hermeneutics. Hermeneutics
emphasizes the importance of interpretation and observation in understanding society
and the world. It suggests that the real society depends on the construction and
interpretation of individuals, so it develops its own observation methods and empirical
analysis methods. Hermeneutics includes strong subjectivity. On the contrary,
objectivism is positivism (Slevitch, 2011:77). The core argument of positivism is that
world knowledge is obtained by applying scientific methods to experience, the
empirical world and empirical society to form the so-called "quantitative research"
(Newby, 2010). Quantitative epistemology emphasizes that the existence of objective
reality is independent of human perception (Slevitch, 2011:76). In other words,
researchers can find a series of possible causes through objective observation and
description, but they will not interfere with the research (Tuli, 2010:99). Positivism
has the advantages of reliability of data and objectivity of results. Thus, the purpose of
this paper is to observe the general and objective impact of R & D expenditure on
different dimensions of performance at different stages of the organization, and to
propose R & D strategies that are beneficial to the organization based on these
findings. The whole paper includes eight hypotheses and verifies the relationship
between R & D expenditure and several related dependent variables. Therefore, the
philosophy of this study is closer to the positivism of epistemology.

3.2 Selection of research methods

In research, two of the forms of logical reasoning are often used by scholars:
induction and deduction.
The inductive method uses analysis of various parts of the world's unique diversity,
concludes rules and similarities based on the analysis results (Reichertz, 2013:127). It
is considered as the main form of inference for the discovery of new ideas (ibid).
However, the conclusion is drawn based on the observations and analysis of research
participants. Because not all subjects can be included, the conclusion lacks
universality and reliability. In addition, the researchers noted that there was no
scientific value in collecting data under hypothetical circumstances (Lawson,
2005:718). The deductive method is complementary to the inductive research. Evans
(2013:269) pointed out that the premise of deduction is the existence of truth and
hypothesis. It is used to draw a conclusion from known things to infer and verify the
correctness of the
conclusion.
The purpose of this study is to analyze the data, compare the relevant literature and
evaluate eight relevant and progressive hypotheses. It is more in line with the logical
order of "deductive method". Moreover, the deductive method of reasoning yields
more reliable conclusions and saves time for data collection and management.

3.3 The research methods

Many scholars of methodology have discussed two research methods: qualitative
research and quantitative research.
Researchers conducting qualitative research collect data through interviews, focus
groups and participant observations (Fossey et al., 2002:725). Then, the researchers
write reports through analysis. Its purpose is to enable researchers to study and
develop their understanding and experience of the meaning of human life and the
social world. Qualitative research methods usually focus on the interaction between
the researcher and the subject over a specific period of time (Tuli, 2010). Building
partnerships with research participants can lead to a deeper understanding of the
research environment, thereby adding richness and depth to the findings (ibid).
Therefore, qualitative methodology is inductive. Moreover, Qualitative research is
discovery - and process-oriented and highly effective, focusing on a deeper
understanding of research issues in its unique context (Ulin et al., 2005). Compared
with quantitative research, qualitative research is more flexible and can adjust to fit
the research focus. But qualitative research also has some weaknesses, such as being
time-consuming and can be easily influenced by researchers.
On the other hand, quantitative research includes data collection, information
quantification and statistics, and ultimately supports or rejects the null hypothesis
through data conclusions. (Williams, 2007). Its purpose is to establish or confirm the
interactions between independent variables and their influence on dependent
variables. The final results are helpful for forming a theory (Leedy and Ormrod,
2001:102). In quantitative research, sample size is very important, because a large
sample size can enhance the representativeness and universality of research (Slevitch,
2011:78). In addition, Leedy and Ormrod pointed out that quantitative research is
conducted based on existing theories, and there will be many hypotheses and
problems. Other characteristics of quantitative research include: researchers
conducted the tests in a controlled environment using predetermined tools and the
research itself is independent of the researcher. Results and data are used to
objectively measure reality. Therefore, compared with subjective understanding in
qualitative research, quantitative research data statistics is more objective and the
collection method is more structured.
As mentioned in the deductive method section, the purpose of this study is to test
some hypotheses to explain the relationships between R & D expenditure and firm
performance in different dimensions, and whether these assumptions are universal in
high-tech companies. Therefore, the quantitative research
method is more suitable for this study. In addition, since data in the annual reports are
used in this study, which have been collected at a specific time, the cross-sectional
data used in this study is a part of objective Epistemology (Easterby-Smith, 2008).

3.4 Samples and data

The sample of this paper includes listed Chinese high-tech industrial companies.
China is one of the largest emerging economies in the world, and its technology-based
industries are developing rapidly, which has gradually become the focus of the
world’s attention. Moreover, the high-tech industry is a knowledge and technology-
intensive industry, so it requires a large amount of R & D investment. In other words,
the samples of China's high-tech industries are representative and universal, providing
an effective reference for scholars and practitioners.
Because the annual reports of listed companies must be audited by accountants, the
data obtained from the annual reports are reliable. Therefore, this paper decided to
choose listed companies as a sample to investigate. However, due to the late start of
China's high-tech industry, the listing of companies is limited. Therefore, in order to
ensure the quality and quantity of the samples, the final sample of this paper includes
1800 annual data observations of enterprises from 2012 to 2017.
The sample of this study includes 300 companies, and their financial data from 2012
to 2017 have been obtained for analyses (time series =6, number of cross sections
=300).
Sample composition according to life cycle is shown in Table 3-1.

Table 3-1 Sample composition

Stage Birth Growth Maturity Decline Total (N)
Year
2012 58 70 153 19 300
2013 36 97 132 35 300
2014 54 108 116 22 300
2015 35 151 94 20 300
2016 35 147 99 19 300
2017 49 124 100 27 300
Total (N) 267 697 694 142 1800
The stage of a company would change over time. For example, a company that was
born at year T can be enter the growth stage at year T+3. Therefore, it is difficult to
construct panel data sets for different organization life cycles. Therefore, this paper
uses OLS regression instead of panel data to study the influence at different stages. In
addition, Dickinson's cash flow model ensures that the cycle stages of a single
enterprise are highly consistent within one year, which solves the problem of
classifiable reliability.
3.5 Empirical model

3.5.1 Financial performance

We set up Model 1 to test the influence of R & D intensity on financial performance.
The dependent variable of model 1 is return on assets (ROA),
and its value is net profit divided by total assets. The model is：
ROA=β0 +β1 RDSt+β2SRt+β3DRt+β4SIZEt+εt
RDS stands for R & D expenditure intensity, which is the natural logarithm of
the ratio of R & D expenditure to operating income at the end of the year. We
distinguish the life cycle stages of enterprises according to Dickinson's cash flow
model, and analyze the model according to different stages. The positive and negative
sign of β1 in the model can reflect the relationship between R & D intensity and
corporate financial performance. We predict that the impact of R&D intensity on
financial performance will be different at different stages of the enterprise life cycle,
so the criteria will be different at each stage.
The research includes many control variables related to financial performance. The net
profit rate of sales (SR) is introduced into the model. It is equal to the ratio of net profit
to sales income. We can avoid attributing sales-driven financial growth to R & D by
controlling SR. Moreover, because the growth of SR can promote the growth of
financial performance, its coefficient will yield a positive value (+). In addition, we
use the ratio of debt to total assets to compute the debt ratio (DR). According to
previous studies, the increase of debt ratio will lead to the increase of enterprise
financial cost, which is not conducive to the increase of enterprise financial
performance. Therefore, the regression coefficient of DR should be negative (-).
Finally, the size of the company will also have an impact on the financial performance
of enterprises. Within a certain level, the increase of a company’s scale will produce
economies of scale, which is beneficial to the growth of financial performance of
enterprises. However, after exceeding a certain level, the increase of cost brought by
the increase of company size will have a negative (-) impact on the financial
performance of enterprises.
3.5.2 Value performance
Model 2 is constructed to study the influence of R & D expenditure on enterprise
value. The dependent variable in the model is the total share capital (TSC), which is
expressed by the natural logarithm of the total share capital. The model is as follows:
TSC=β0+β1RDt +β2 INSt+β3 INDt+β4 PATt+εt
R & D expenditure (RD) is expressed by the natural logarithm of R & D expenditure
of enterprises. The same research will include the analysis of the life cycle of different
organizations. This study contains many control variables that affect the enterprise
value. First of all, the sales revenue (INS) of an enterprise affects the direct profit of
the enterprise, which further affects the value of the enterprise. In addition, as the
second control variable, debt (IND) is expressed by the natural logarithm of the total
debt of the enterprise. Previous
studies have shown that the increase of corporate debt can increase the amount of
financing and have a positive impact on the value of enterprises. Therefore, the
regression coefficient of debt will be shown as a positive value (+). Finally, technical
performance (PAT), the third control variable, is expressed by the number of patents
obtained. The more patents an enterprise owns, the higher the core technology
mastered by the enterprise, which can help the enterprise improve production
efficiency and profit. Therefore, patents are positively correlated with enterprise value
(+).

3.5.3 Technical performance

The third model is used to investigate the influence of R&D intensity on enterprise
technical performance. In this study, the number of patents obtained by enterprises is
taken as natural logarithm to express technical performance (PAT). The model is as
follows:
PAT=β0+β1RDSt+β2 SIZEt +εt
The RDS is the same as that in section 3.5.1. As the only control variable, the SIZE of
an enterprise is expressed by the natural logarithm of its total assets. Studies have
shown that large-scale companies are more capable of transforming R & D into
patents. However, when the enterprise is in the non- recession stage, the larger the
enterprise, the greater the cost burden, the less conducive it is to obtaining patents.
Therefore, the relationships between SIZE and PAT should be different with the
different organizational life cycle.

3.6 Measurement of variables

In this study, the most important control variable is the organizational life cycle stage.
There are four types of methods to determine the enterprise life stage: single variable
analysis method, comprehensive index analysis method, cash flow combination
method and other special methods. In this paper, we will use the cash flow method
proposed by Dickinson (56, 2011) to measure the enterprises’ life cycle stages.
Dickinson divided cash flow into operating cash flow, investment cash flow and
financing cash flow, and then classified the company according to the cash flow
pattern of each stage of operations. For example, companies at the birth stage usually
need a lot of funds due to the lack of customers and the need for cost publicity.
However, as sales have not yet been maximized at this stage, cash flow from
operating activities should be negative (-). In order to increase market share,
enterprises should make investment at this stage, so the cash flow of investment
activities is also negative (-). In addition, due to the external access funds of these
investments, the cash flow from financing activities is positive (+). At the growth
stage, with the increase of investment and efficiency, the increase of marginal profit
will change the cash flow of operating activities from negative values to positive
values (+). At this time, in order to meet the rapid growth of sales, the enterprise
would increase investments, so the cash flow of investment activities should still be
negative (-). Therefore, the cash flow of financing activities is expected to be positive
(+). Next, at the mature stage, the high level of profit maintains
the positive cash flow of operating activities (+). The enterprise can continue to
invest or adopt conservative operations, so the cash flow of investment activities
can be positive or negative (+ / -). At this stage, due to the repayment of external
funds, the cash flow of financing activities is expected to be negative (-). In
addition, cash flow from operating activities is expected to be negative (-) during
the recession due to reduced profits. Last, the decline phase is accompanied by the
reduction of investment and the disposal of assets, so the cash flow of investment
activities is positive (+). The expectations of cash flow from financing activities
are different.

Table 3-2 The consolidated cash flow method

Birth stage Growth Maturity Decline
Operating cash flow - + + -
Investing cash flow - - - -
Financing cash flow + + - -／+