R&D investment around the world: Effects of ownership and performance‐based cultural contexts

• DOI: http://doi.org/10.1002/tie.22187
• Author: Krista B. Lewellyn,Rosey ‘Shuji’ Bao
• Published date: 01 March 2021
• Date: 01 March 2021

RESEARCH ARTICLE

R&D investment around the world: Effects of ownership

and performance-based cultural contexts

Krista B. Lewellyn

1

| Rosey ‘Shuji’Bao

2

1

Barney Barnett School of Business and Free

Enterprise, Florida Southern College, Lakeland,

Florida

2

Martha and Spencer Love School of Business,

Elon University, Elon, North Carolina

Correspondence

Krista B. Lewellyn, Barney Barnett School of

Business and Free Enterprise, Florida Southern

College, 111 Lake Hollingsworth Drive,

Lakeland, FL 33801.

Email: klewellyn@flsouthern.edu

Abstract

This study examines how ownership by different types of shareholders affects firm-

level research and development (R&D) investment. Integrating agency and resource

dependence theories, we predict that up to a certain level, firm ownership by banks,

corporations, governments, and insiders will positively relate to R&D investment.

However, as ownership continues to increase, these shareholders shift their focus to

personal wealth concerns, which makes owners more conservative towards R&D

investment, resulting in reductions of R&D investment. Applying an institution-based

view, we expect the norms associated with performance-based national cultures to

moderate the curvilinear relationships between ownership and R&D investment. We

test our hypotheses with a sample of 11,262 firms from 35 countries and find that

ownership by banks, corporations, and governments has a curvilinear inverted U-

shaped relationship with R&D investment. Further, operating in a performance-based

culture enhances the effects for corporation and government ownership. Our find-

ings contribute unique insights about what drives the important strategic activity of

investing in R&D.

KEYWORDS

agency theory, firm ownership, institution-based view, performance-based culture, R&D

investment, resource dependence theory

1|INTRODUCTION

Chinese e-commerce giant Alibaba has unveiled plans to

invest $15 billion in R&D. The scope of research to be

conducted is broad, focusing on both “foundational and

disruptive technology,”says Alibaba. (Vincent, 2017)

Apple CEO Tim Cook was asked about the increase in

R&D spending. He said: “The products that are in R&D,

there is quite a bit of investment in there for products

and services that are not currently shipping.”

(Leswing, 2017)

Investing in research and development (R&D) is an important stra-

tegic initiative for firms competing in the global competitive arena

(Bobillo, Sanz, & Gaite, 2006). As the opening quotes suggest,

R&D involves enhancing existing products and processes, but also

discovering new ways of satisfying customers and achieving suc-

cess. The quotes also underscore the magnitude of investment

that R&D often entails. R&D investments have paybacks that are

highly ambiguous, uncertain, and provide returns geared towards

the long-term rather than the short-term (David, Hitt, &

Gimeno, 2001; Lee & O'Neill, 2003). For these reasons, scholars

from various disciplines have used R&D investment as a way to

conceptualize a variety of firm-level intentions, decisions, and

attributes (Bromiley, Rau, & Zhang, 2017). For example, R&D

investment has a long record of being a proxy for firm-level risk-

taking (e.g., Chen & Miller, 2007; Hoskisson, Hitt, & Hill, 1993;

Miller & Bromiley, 1990). It has also been used to reflect whether

a firm has a short-term or long-term approach to strategy

(e.g., Luo, Sun, & Wang, 2011), is engaging in strategic search

DOI: 10.1002/tie.22187

Thunderbird Int. Bus. Rev. 2021;63:217–233. wileyonlinelibrary.com/journal/tie © 2020 Wiley Periodicals LLC. 217

activities (e.g., Lewellyn & Bao, 2015), or has strategic capabilities

(e.g., Iyer & Miller, 2008).

Each of these different conceptualizations suggests that firms are

motivated to invest in R&D investments to enhance performance.

Although positive outcomes are not a guarantee of R&D investment,

we can assume that firms would not be making such investments if

the consequences were perceived to be negative. Yet, we know that

the level of R&D investment varies across firms and across countries

(Gërguri-Rashiti, Ramadani, Abazi-Alili, Dana, & Ratten, 2017), thus

suggesting that the belief in the causal attribution of such investment

leading to improved performance, may vary also.

Although investing in R&D has the potential to provide superior

returns to shareholders (Koussis & Martzoukos, 2012) such invest-

ment may adversely affect short-term earnings and only have positive

returns in the distant future (Hoskisson et al., 1993). Indeed, previous

research has shown in U.S. firms, that the future benefits of R&D

investment are much more uncertain than other investments, such as

capital expenditures (Kothari, Laguerre, & Leone, 2002; Laamanen &

Keil, 2008). These uncertainties may lead firms to make suboptimal

investments in R&D activities, which can negatively impact their

innovation and growth (Billings, Musazi, & Moore, 2004).

Agency theory suggests that increasing both internal and external

ownership may be an effective governance mechanism for motivating

managers to appropriately invest in R&D (Demsetz & Lehn, 1985).

However, prior studies are inconclusive on whether greater owner-

ship by insiders and external shareholders effectively deals with

agency issues (Boyd & Solarino, 2016). One possibility for the incon-

sistencies in prior research is that the relationships may be nonlinear

in nature. Yet, the possibility of curvilinear relationships between dif-

ferent types of firm owners and R&D investment across countries has

been overlooked in the international business literature. To address

this issue, our study focuses on the following two related research

questions: (a) How do different levels of ownership by different types

of owners influence firm-level R&D investment across countries? and

(b) How are the relationships affected by national culture?

We examine these research questions by complementing agency

theory-based arguments with those of resource dependence theory

(RDT) (Pfeffer & Salancik, 1978). From the RDT perspective, owner-

ship “represents a source of power that can be used to either support

or oppose management depending on how it is concentrated and

used”(Salancik & Pfeffer, 1980, p. 655). Owners provide vital financial

resources to the firm along with other important resources such as

stability (Gilson & Milhaupt, 2009), expert advice, and legitimacy

(Connelly et al., 2010), and in response, expect returns on their invest-

ment. When R&D is viewed as offering the potential for positive pay-

outs, powerful owners are expected to favor investing in such

activities. However, when their ownership gets to a certain level, their

attention may shift to wealth preservation concerns, such that they

favor reduced spending on R&D to reduce risk associated with such

spending. Therefore, we propose inverted U-shaped relationships

between ownership by important shareholders and R&D investment.

In this study, we also apply an institution-based view (Peng, Sun,

Pinkham, & Chen, 2009) to the question of how relationships

between owners and R&D investment are moderated by national cul-

ture. The institution-based view “focuses on the dynamic interaction

between institutions and organizations and considers strategic choices

as the outcome of such an interaction”(Peng et al. 2009, p. 6). The

level of investment in R&D is a strategic choice, which we argue is

indeed an outcome of such interaction. Previous research has linked

diversity in firm-level R&D investment across countries to formal

institutions, such as fiscal incentives, public sector investment, eco-

nomic openness, patent protections, and regulatory environment

(Falk, 2006). We propose that the relationships between firm owner-

ship and R&D investment will be moderated by the prevailing values,

norms, and beliefs that are part of the informal institutional context;

in other words, the national culture in which firms are embedded.

More specifically, when firms are domiciled in performance-based

national cultures (PBCs), whereby societal members are highly ori-

ented towards achievement and emphasize systematic planning for

accomplishing future goals (Stephan & Uhlaner, 2010), we anticipate

that both the benefits and disadvantages of ownership for R&D

investment will be accentuated.

We test our theoretical framework in a multilevel analysis of

11,262 firms from 35 countries. We find that ownership by three

important shareholder groups: banks, corporations, and government,

have curvilinear relationships with firm-level R&D investment. We

also find that the extent to which a country has a PBC, moderates the

curvilinear relationship between corporate ownership and R&D

investment as well as that between government ownership and R&D

investment. Although differences in firm ownership patterns across

countries have been noted in international business literature, how

these variations interact with their institutional context remain rela-

tively unexplored (Aguilera & Jackson, 2010). Our study thus makes

inroads into the important question about the role different types of

owners play in affecting firm-level strategic decisions around the

world. Furthermore, these findings contribute unique insights to inter-

national business research by showing that national level PBC, an

informal institution, significantly shapes strategic choices about

investing in R&D. Finally, our integration of resource dependence and

agency theories provides new insights and contextualization of these

seminal perspectives.

The remainder of this paper is organized as follows. In the next

section, we develop the arguments that lead to our hypotheses,

including a discussion of the theoretical perspectives underlying our

conceptual framework. Next, we present the methodology and the

results. We conclude by discussing the theoretical and practical impli-

cations of our findings, along with highlighting certain limitations and

avenues for future research.

2|THEORETICAL BACKGROUND AND

HYPOTHESES DEVELOPMENT

Different owners have different levels of tolerance about the riskiness

and time-horizon of firm investments, as well as having a variety of

reasons for investing in firms (Hautz, Mayer, & Stadler, 2013) all of

218 LEWELLYN AND BAO