Board Capital, CEO Power and R&D Investment in Electronics Firms

• Date: 01 September 2014
• Published date: 01 September 2014
• Author: Hsiang‐Lan Chen
• DOI: http://doi.org/10.1111/corg.12076

Board Capital, CEO Power and R&D Investment

in Electronics Firms

Hsiang-Lan Chen*

ABSTRACT

Manuscript Type: Empirical

Research Question/Issue: Building on resource dependence theory, this paper examines the effect of board capital and the

moderating effect of CEO power on R&D investment.

Research Findings/Insights: Based on a panel of electronics f‌irms in Taiwan, the results indicate that board capital

(directors’ educationallevel, directors’ industry-specif‌ic experience and interlocking directorate ties) has a positive effect on

R&D investment and that CEO power positively moderates this effect. Theempirical evidence suggests that when powerful

CEOs are present, directors with human and social capitalwill devote more effort to providing valuable strategicadvice and

resources and thus will support R&D investment to enhance innovative capabilities.

Theoretical/Academic Implications: This study contributes to knowledge on corporate governance by bridging the gap in

the relationship between board capital and R&D investment via an empirical inquiry into the inf‌luence of CEO power on

a board’s resource provision. The f‌indings suggest that research aiming to elucidate the resource dependence role of board

capital in shaping R&D investment should consider the potential moderating role of CEO power. Thus, this study should

not only supplement the resource dependence literature by providing a more thorough understanding of the relationship

between board capital and R&D investment but also delve into the black box of CEO-board relations, an important topic

within corporate governance research.

Practitioner/Policy Implications: This study suggests that when the boards of f‌irms competing in innovation through R&D

investment (e.g., electronics f‌irms) search for new board members, they should consider the educational level, industry-

specif‌ic experience and interlocking directorate ties of potential directors and how those potential directors complement or

reinforce the existing boardin order to enhance their ability to obtain valuablestrategic information and substantial resources

that would facilitate better R&D investment decisions. Additionally, those R&D f‌irms may be advised to have a combination

of a powerful CEO and a board consisting of directors with more education, directors with industry-specif‌ic experience and

directors with interlocking directorateties because the presence of a powerful CEO may motivatedirectors to provide ongoing

advice and resources, leading to increased R&D investment necessary to enhance innovation capabilities.

Keywords: Corporate Governance, R&D Investment, Board Capital, CEO Power

INTRODUCTION

In October 1984, the Gavilan Computer Corporation, the

world’s f‌irst laptop computer maker, f‌iled for bank-

ruptcy protection under Chapter 11 because Gavilan expe-

rienced delays and indecisions that ultimately cost the f‌irm

its early technical and market advantages (Eisenhardt, 1989).

The press attributed Gavilan’s failure to its awkward and

uncomfortable products, lack of awareness of competitors’

products with low prices and comparable features, delays in

quantity shipments due to f‌ixing bugs, and ineff‌icient

method of distribution. The Gavilan story lays the ground-

work for this paper, which investigates the conditions under

which f‌irms can acquire adequate real-time information and

valuable resources to facilitate eff‌icient decision making in

research and development (R&D) investment. To do so, this

study examines the relationships among board capital (the

sum of board human and social capital), CEO power, and

R&D investment.

During times of increasing market competition, many

f‌irms (particularly electronics f‌irms) must invest con-

tinuously and heavily in R&D (Balkin, Markman, &

*Address for correspondence: Hsiang-Lan Chen, Department of Finance, National

Kaohsiung First University of Science and Technology, no. 2, Jhuoyue Rd., NanZih

District, Kaohsiung City 811, Taiwan. Fax: +886-7-601-1041; E-mail:angelachen@

ccms.nkfust.edu.tw

422

Corporate Governance: An International Review, 2014, 22(5): 422–436

© 2014 John Wiley & Sons Ltd

doi:10.1111/corg.12076