Corporate Governance and Its Impact on R&D Investment in Emerging Markets

Abstract

Corporate research and development (R&D) may contribute to the development of emerging market countries. However, corporate R&D activities are inherently risky and difficult to monitor, and ownership of emerging market firms is generally relatively concentrated and shareholder protection relatively limited. Against this background, we examine the impact of (firm-level) ownership structures and (country-level) shareholder rights protection on corporate investment in R&D for a large sample of publicly listed firms from 24 emerging market economies. We find that R&D intensity is lower in firms with high ownership concentration and this effect is more pronounced in countries with stronger shareholder rights protection. These results are robust to selection and endogeneity concerns, non-linear specifications, alternative variable definitions, and alternative sampling procedures. Finally, we document that the ownership effect is driven by strategic blockholders, while ownership of institutional investors in contrast is marginally beneficial for R&D intensity. Overall, our results suggests that, similar to the situation in developed economies, dispersed ownership, which allows shareholders to diversify their investment risks, is beneficial for corporate R&D and that this effect is intensified by more developed institutions.

Keywords: R&D Investment, Ownership, Shareholder Rights Protection, Emerging Markets

JEL Classification: G32, G34