Corporate research and development (R&D) investment plays a pivotal role in a firm’s future growth. R&D expenditures normally result in new product(s) and techniques that help a firm develop and sustain its competitive advantage, to increase market share, or to penetrate new markets. Finance and economics literature has documented that a firm’s R&D investment has a positive and consistent influence on the market valuation of the firm (see Chan et al., 1990; Chauvin and Hirschey, 1993; Lee and Shim, 1995; Szewczyk et al., 1996; Bae and Seungwook, 2001). Lee and Shim, 1995, for example, show that the relationship between R&D activity and market growth in high-tech industries is positive and significant in both United States and Japan over a 5-year period from 1986 through 1990. While the evidence on the effectiveness of R&D investments is abundant, little attention has been given to the R&D activities of the firms or industries across regions such as Asia Pacific, Europe and North America. This paper intends to fill this gap.
The worldwide distribution of R&D performance is concentrated on relatively few industrialized nations. Of the $638 billion in estimated 2001 R&D expenditures for the 30 OECD1 countries, fully 81 percent is expended in only G-7 countries (see Table 1.1). These estimates are based on reported R&D investments converted to U.S. dollars with purchasing power parity (PPP) exchange rates2. The North America (U.S. and Canada) continually accounts for roughly 45 percent, European Union accounts for 29 percent and Asia Pacific3
1 Current OECD members are Australia, Austria, Belgium, Canada, the Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Japan, South Korea, Luxembourg, Mexico, the Netherlands, New Zealand, Norway, Poland, Portugal, the Slovak Republic, Spain, Sweden, Switzerland, Turkey, the United Kingdom, and the United States.
2 Although PPPs technically are not equivalent to R&D exchange rates, they better reflect differences in countries’ research costs than do market exchange rates.
3 Asia Pacific countries are Japan, South Korea (OECD members) and China, Singapore and Taiwan
accounts for 30 percent of all OECD member countries’ R&D investments4 (see Figure 1.1).
In particular, U.S. R&D investments continue to outdistance by 150 percent R&D investments made in Japan, the second largest R&D-performing country. The United States not only spent more money on R&D activities in 2001 than any other country but also spent as much by itself as the rest of the G-7 countries.
Table 1.1 Gross domestic expenditure on R&D (millions of current PPP dollars)
1997 1998 1999 2000 2001 United States 212,690.3 226,767.1 244,023.8 265,194.0 274,757.6
Canada 12,456.3 13,483.1 14,666.5 16,193.4 17,408.6
Japan 90,754.4 90,507.6 92,773.7 98,320.2 103,845.4
China 25,384.3 27,938.6 35,985.2 48,509.2 57,144.0
South Korea 16,181.8 14,446.0 15,792.6 18,939.6 22,009.2
Taiwan 7,859.2 8,600.3 9,616.8 10,326.0 10,901.9
Singapore 1,115.7 1,358.0 1,576.2 1,810.5 1,972.0
G-7 423,461.4 442,548.3 471,487.1 508,757.7 515,557.7 European Union 143,841.0 150,527.0 162,520.0 175,713.0 187,210.0 Total OECD 500,438.8 521,003.0 557,056.0 604,341.0 638,411.5 SOURCE: RAND, based on OECD, Main Science and Technology Indicators: 2004-2 Edition.
Another indicator of a country’s commitment to growth in science and technology is the ratio of R&D spending to the GDP. According to the most-recent data from the OECD5, Sweden has the highest R&D-to-GDP ratio, followed by Finland, Iceland, Japan, South Korea and United States. Other large R&D performers in the OECD, including Switzerland, Germany, Denmark, France, Belgium, and Austria, all invest smaller shares of their GDP in
(Non-OECD members).
4 Most of the R&D data presented here are from reports to OECD, the most reliable source of such international comparisons.
R&D than the United States. Of the non-OECD member countries, Israel and Taiwan’s R&D-to-GDP ratios compare favorably with those of the OECD member countries. Although China and Russia spend a lot in absolute terms on R&D, their investments in R&D as shares of their GDPs are substantially lower than that of the OECD member countries.
0%
Figure 1.1 Share of total R&D among the three regions
Absolute levels of R&D expenditures are indicators of the breadth and scope of a nation’s scientific and technological (S&T) activities and are a harbinger of future growth and productivity. Indeed, investments in the R&D enterprise strengthen the technological base on which economic prosperity increasingly depends worldwide. As we have seen, North America, especially, the United States has led the world in total spending on R&D in contrast with Europe and Asia Pacific. At present, however, five other nations (Sweden, Finland and Iceland from Europe; Japan and South Korea from Asia Pacific) spend more of their GDP on R&D than does the United States. Accordingly, since the differences in absolute and relative
(R&D-to-GDP ratio) levels of R&D expenditures, whether R&D investment influences firm performances differently among North America, Europe and Asia Pacific.
Regarding the firm performance measures, most studies show the ROA and Tobin’s q are the key variables. This paper simultaneously utilizes market- and accounting-based measures of the firm performance, Tobin’s q and ROA, the two alternative measures of performance, one is based on market based measure and the other is based on accounting measure of performance. In particular, Tobin’s q (defined as the ratio of the market value to replacement values of a firm’s assets) has been used to explain a wide variety of phenomena. Tobin (1969) argues that q measures profitable investment opportunities. Lindenberg and Ross (1981) use q as a measure of the capitalized value of monopoly rents. Cockburn and Griliches (1988) and Griliches (1981) relate q to intangible capital. The purpose of this study is to investigate whether measures of R&D expenditure contribute significantly to variation in q and ROA differently among North America, Europe and Asia Pacific.
Several previous studies have demonstrated that there is merit in investigating this issue in industry studies. Examples are as follows: Megna and Klock, 1993 (investigating semiconductors); Chauvin and Hirschey, 1993 (investigating manufacturing and non-manufacturing sectors); Megna and Klock, 1993 (investigating semiconductors); Megna and Klock, 2000 (investigating wireless communications); and Christoffersen, 2002 (investigating textiles). In these different industries, R&D activity is considered one of the most important parts of maintaining a lead, especially, in high-tech industries (e.g., chemicals, drugs, electric and electronics, and machinery). Specifically, R&D activity seems to substantially contribute to high-tech industries in gaining competitive advantage as well as superior market performance (Tassey, 1983). For the reason, there are three different high-tech industries employed in our study, which are Chemicals & Pharmaceutics, Machinery & Computer Hardware and Electrical & Electronics, respectively.
Finally, because industries differ widely in the effectiveness of R&D, even if all industries from high-tech industries, studies that include data from various industries are flawed by too much aggregation. Hence, the paper also examines whether R&D investment influences Tobin’s q and ROA differently among North America, Europe and Asia Pacific based on industries classified according the Chemicals, Machinery and Electrical.
The remainder of the paper is organized as follows. The section 2 reviews relevant literature on R&D expenditures and firm performances. The section 3 describes research design and methodology. The section 4 presents empirical results and provides analysis. The section 5 concludes the paper.