Institutions and R&D Investment: Prospects and Challenges
Call for papers for: Journal of Applied Accounting Research
The submission portal for this special issue will open on 1 May 2021.
Institutions and R&D Investment: Prospects and Challenges
Professor Hassan Yazdifar, Bournemouth University, UK
Dr Ashraful Alam, University of Salford, UK
Dr Moshfique Uddin, University of Leeds, UK
This special issue of Journal of Applied Accounting Research will focus on issues surrounding the growth of Research and Development (R&D) in emerging markets in order to better understand the changing institutions in both the developed and emerging world. Its aim is to provide space to explore potential linkages between institutional settings in different economies and R&D investment.
The importance of R&D expenditure has been documented widely in empirical literature. Walde and Woitek (2004) pointed out that R&D expenditure by profitable firms is the source of both long-run and short-run profitability and sustainability of firms. More recently, Perez-Sebastian (2015) concluded that lack of appropriate R&D policy could be the cause of low economic growth, low wages, large unemployment rates and even large trade deficit. Considering the importance of R&D investments in both attaining economic growth and corporate sustainability, Cohen (2010) concluded that exploring the determinants of R&D investments should be treated as a crucial part of innovation research. Following on Cohen’s observation, a number of researchers have been coming forward to explore the link between institutions and R&D investments.
R&D is riskier than other tangible investments due to high degree of information asymmetry involved in it (Keupp and Gassmann, 2009). Stronger institutional settings can offer much needed safety and confidence to the investors to react positively about such investments. Therefore, institutions – both formal and informal (North, 1991; Williamson, 2000) paly a crucial role in influencing R&D investment. For example, Alam et al. (2019) examine the role of government effectiveness, rule of law, regulatory quality, corruption and political instability on R&D investment and find these formal set of institutions to be significant in explaining firm level R&D investment behaviour. Similarly, Alam et al. (2020) find that the country level corporate governance significantly affect R&D investments. Legal strength could be crucial to build investor confidence and boost innovative activities. Building on law and finance literature, Brown et al. (2013) have found a strong positive link between investor protection and corporate R&D expenditure. It has been argued in Brown et al. (2013) that strict investor protection leads to better chance of accessing external equity market at a cheaper cost and therefore firms can afford to make more investments in R&D activities. Moreover, Xiao (2013) stated that legal protection to shareholders reduces the agency conflict and solve the under and over investment problem of R&D activities. Contract enforcement has also been examined as an important determinants of R&D investment. Seitz and Watzinger (2017) find conclusive evidence that stronger contract enforcement encourage R&D investments. Patent laws (Budish et al. 2016), intellectual property rights (Lerner, 2009), creditor friendly bankruptcy codes (Acharya and Subramanian, 2009), stronger employment protection laws (Acharya et al., 2014) and antitrust policies (Segal and Whinston, 2007) are also important components of legal system that affect R&D investments.
However, too much of legal protection and enforcement of very strict laws may hinder innovative activities. For example, in an interview, Milton Friedman mentioned that implementation of very strict governance laws, such as Sarbanes-Oxley (SOX) Act, hinders the innovation. Sarbanes-Oxley act represents strict governance provisions and protects investors. However, a number of researchers including Bargeron, Lehn and Zutter (2010) and Kang, Liu and Qi (2010) have pointed out that enforcement of this act has indeed reduces the investment. The basic argument of these studies is that strict governance regulations would increase the compliance cost and therefore firms feel discouraged to raise external capital which in turn reduces the corporate investments such as R&D investments. Moreover, Bargeron et al. (2010) mentioned that some of the provisions in SOX strongly discourage managers to make risky investments. As R&D investment is regarded as risky investments, it is likely that stringent investor protection laws and/ or governance provisions will reduce R&D investments. Therefore, the nature of relation between components of legal system and R&D investments may not always be straight forward and warrants further research in this area.
Research on Institutions and R&D investment has been making further progress in recent times and started looking at informal institutions and their effect on innovative activities. For example, Lewellyn and Bao (2015) explore the effect of national culture on firm level R&D investments. They argue that national culture reflect behavioral norms and attitudes of decision makers and therefore should affect the R&D investment decisions. Similarly, Yan et al. (forthcoming) evaluated the culture and R&D investment nexus using Confusian culture - a dominant Chinese cultural trait. Similar to culture, language may also affects cognition and decision making (Chi et al., 2020) and eventually affect R&D investments. Research combining culture and R&D is a relatively under developed and there is need to further research to understand this in more clear and detail way.
Exogenous economic shocks such as recent financial crisis have great impacts on R&D investments. While Bloom (2007) argue that R&D investment slows down during financial crisis due to caution effect, Peia and Romelli (forthcoming) point out the increased level of financial friction as the cause of fall in R&D investment during financial crisis. However, Eslamloueyan and Jafari (2019) argue that better institutional quality can help to circumvent financial friction and help to improve innovative activities during crisis. It would be interesting to see more evidence on this to see if institutional quality really has any material effect in safeguarding required level of R&D investment during exegenous shocks such as financial crisis or global pandemics (COVID – 19 or similar events).
In recent years, R&D investments in emerging markets is increasing considerably because of strategic reasons and also for the higher returns from R&D investment compared to those of advanced countries (Lederman and Maloney, 2003; Alam et al., 2020; Nasseri et al. 2020; Ballas and Demirakos, 2018; Komang Ayu and Noorlailie, 2020). However, existing knowledge on institutions and R&D investment (which is more skewed to developed nations) is not enough to explain the growth of R&D in emerging markets. Peng et al. (2008) state that institutional quality in emerging markets is significantly different from developed markets. Therefore, it is imperative to examine the effect of institutions on R&D investment from the context of emerging markets.
The call is in the spirit of the growing quest for a better understanding about the changing institutions in both the developed and emerging world. Our aim is to provide space to explore these potential linkages between institutional setting in different economies and the R&D investment. Topics could include but are not limited to the following:
- How and why institutions shape up the R&D investment in various economies
- How different components of formal and informal institutions such as market regulations, accounting policies, investors protection, culture etc. differ in MNCs and SMEs for R&D investment
- How the exogeneous shocks such as financial crisis or COVID-19 play an important part in shaping up institutions and R&D investment in both developed and emerging markets
- How Corporate Governance may promote of deter R&D investment
- How climate change promotes or deter R&D investments in different institutional settings
- FinTech, institutions and R&D investment
- Institutional Quality, accounting regulations and R&D investments.
We are particularly interested in papers makes substantial contribution to accounting and finance research. Both empirical and conceptual papers are welcome. The guest editors do not have any methodological preference.
- Submission deadline: 31 July 2021
- Fully reviewed manuscript ready for production: 31 October 2021
- Target Publication Date: early 2022.
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