Executive Equity Incentive, Organizational Slack and R&D Investment
|School||Southwestern University of Finance and Economics|
|Keywords||Executive Equity-based Incentive Organizational Slack R&D Investment High-tech Industries State-owned Property Rights|
China’s rapid economic growth has been globally acknowledged as a miracle since the reform and opening up. However, this extensive economic growth mode emphasizes quantity over quality and efficiency, which leads to severe ecological damage and excessive consumption of resources. Besides, most domestic enterprises remain at the lower end of the global industrial chain. They produce low value-added products and therefore gain slim profits from big production volume. Hence the importance of economic growth pattern transformation. According to the Solow Growth Model, economic growth rate is determined by the increase of labor force and technological advance in the long run, meaning that technological advance plays a more crucial role than capital investment. To add another evidence, the experience of many countries indicate that the main approaches of achieving conversion of economic growth mode are technological advance, promotion of laborer quality and consummation of competitive market system. All these demonstrate the significance of technological advance. Enterprises are primary participants and eventually the major beneficial owner of technological advance.One determining factor of a company’s technology innovation level is its research and development (R&D) investment. Despite the fact that technology innovation generates long-term and core competence, the management may restrain R&D investment due to reasons as avoid personal reputation damage by high risk projects, short-term accounting earnings related compensation, risk decentralization through investments diversification and shortsightedness etc. This thesis is developed on the basis of the technical innovation theory, the principle-agent theory, the equity motivation theory and the organizational slack theory. This research aims at investigating the impact of executive equity-based incentive and organizational slack on enterprises’ R&D investment from a micro perspective, and then explores a practical way to increase R&D investment, improve technology innovation level from inside the enterprise, and finally turn "Made in China" into "Created in China". This thesis is arranged as follows:Chapter1, Introduction. This chapter outlines research background, significance and methodology as well as the framework and writing arrangements. The research objective is to investigate the influencing mechanism of executive equity-based incentive and organizational slack on enterprise R&D investment. Based on existing foreign and domestic literature, this study divides organizational slack into two dimensions:absorbed slack and unabsorbed slack, and then investigate how these two dimensions of slack recourses influence R&D investment from an executive equity-based incentive perspective.Chapter2, Literature review. This chapter summarizes related foreign and domestic literatures from three aspects:R&D investment influencing factors, the relation between executive equity-based incentive and R&D investment and the relation between slack resources and R&D investment. At the end of this chapter, it makes some comments on existing literatures. It identifies the opportunities of this research by finding that there are few empirical evidence on how executive equity-based incentive and slack resources influence R&D investment and how the influence mechanisms differ in state-owned enterprises (SOE) and non state-owned enterprises and in different industries.Chapter3, The theoretical analysis about how executive equity-based incentive and slack resources influence R&D investment. Firstly, this chapter summarizes some features of technological innovation and its main influence factors. Secondly, it finds out that management members may restrain R&D investment due to principal-agent problem by analyzing the principal-agent theory. Thirdly, executive equity-based incentive drives management to be more concerned about the well being and value of the enterprise in the long term, then consequently encourages them to increase R&D investment. Fourthly, an enterprise is more likely to take technological innovation when there are much slack resources. Finally, this chapter take a step further to analyze the influence mechanisms of executive equity-based incentive and slack resources on R&D investment as well as how they differ in SOEs and non SOEs and in different industries, and then puts forward the research hypothesises.Chapter4, The empirical analysis. Based on the theoretical analysis in the previous chapter, this chapter takes empirical approach to examine the research hypothesises using data from the domestic listed companies. This study examined screened data of Shanghai and Shenzhen listed companies during2009-2011and built multivariate linear regression model using STATA12.0, in order to provide strong scientific evidence and shed light on how to raise the level of enterprise technology innovation.Chapter5, Conclusions and outlooks. This chapter is the conclusion section which summarizes the research results, policy recommendations, limitations and outlook for future study.Main findings of this thesis are as follows:(1) Executive equity-based incentive encourages technology innovationThe bigger the executive equity-based incentive the more the R&D investment is. Executive equity-based incentive motivates management to be more concerned about the enterprise’s well being in the long run, and one of the many ways to achieve that is to enhance the enterprise’s core and long-term competence. Since technology innovation is especially important in the high-tech industry, the relation between executive equity-based incentive and R&D investment is more remarkable. In addition, little difference can be found in SOEs and non SOEs, which means executive equity-based incentive works well in both types of companies.(2) Organizational slack facilitates technology innovationPositive correlation is found between organizational slack and R&D investment, which supports the "buffer argument". Slack resources alleviate strikes from both outside and inside the company as well as fund technology innovation. In SOEs, unabsorbed slack is related to R&D investment, while in non SOEs it is the absorbed slack that plays the role. This discrepancy can be explained by the differences of resource endowment and government policy support etc.(3) Executive equity-based incentive regulates the relation between slack resources and R&D investmentExecutive equity-based incentive regulates the relation between slack resources and R&D investment, the higher the executive equity-based incentive the more the management are motivated to mobilize the slack resources to support technology innovation. This effect can only be found in non SOEs, which indicates a lower rate of resources utilization in SOEs.Primary innovation and contribution of this thesis can be summarized as below:(1) Combining equity-based incentive and organizational slackFew literatures can be found on how equity-based incentive and organizational slack join up to affect R&D investment. This study divides slack resources into absorbed slack and unabsorbed slack and then fall them together with equity-based incentive to investigate their joint impact on R&D investment. This thesis brings in a multiplicative interaction variable of equity-based incentive and slack resource and then found that executive equity-based incentive regulates the relation between slack resources and R&D investment, the higher the executive equity-based incentive the more the management are motivated to mobilize the slack resources to support technology innovation.(2) Adding evidence on the positive effects of organizational slackNormally, slack resources give a negative impression as "redundancy" or "inefficiency", this study proves that it is not always the rule. Slack resources can facilitate the technological innovation, especially in a circumstance that management receives equity-based incentive. This thesis supports the "buff argument" of organizational slack and adds new evidence.(3) Taking Chinese enterprise property rights background into considerationChinese SOEs have been blamed for "redundancy","waste" and "inefficiency" for quite long. The particular double principal-agent relationship in Chines SOEs worsens the principal-agent problem. Besides, SOEs have much better resources endowment. They possess most of the resources though non SOEs show higher efficiency. Under this circumstance, this study tries to prove whether SOEs are as inefficient as criticized.