Over the past several decades, the R&D and innovation of firms have received considerable attention in literature related to cooperate governance. Potential benefits of R&D and innovation include a firm-level effect, by which firms develop competitive advantages by improve operation and management ability, and a country-level effect, by which R&D and innovation motivate economic transformation and structural optimization of China. R&D investment is a significant indicator for measuring innovation of firms and innovation is inseparable from the support of funds (Hall, 2000). The existing literatures study R&D expenditure from two aspects. First, the effects of R&D expenditures of firms. Sougiannis (1994), Lev and Sougiannis (1996) prove that R&D expenditures are positive to firms’ performance. Luo T, Zhu Q and Li D (2009) find that the R&D investment in China is positively related to the future profit of the enterprises, and is positively related to the stock price change in the coming year. Second, the external factors affecting firm R&D expenditures. Billings et al. (2010) studied the impact of taxation on R&D expenditures. Fang et al. (2016) studied IPR protection promotes R&D innovation of firms. Li S and Qiu W (2015) found that the higher the R&D expenditures of each province, the higher the level of economic development. Besides, the close correlation between enterprises and the government results in the lower level of R&D expenditure.
Due to the complex system and the internal and external information asymmetry of the enterprise, the existing literature on the impact of internal factors on R&D expenditures mostly focuses on a single internal indicator and lacks holistic and systematic analysis on the determinant of R&D expenditure. Scholars have suggested that organization capital is a comprehensive capability index of the enterprise. As Lev (2009) said, organization capital—the agglomeration of business processes and systems, as well as a unique corporate culture, that enables them to convert factors of production into output more efficiently than competitors. This paper examines the impact of organization capital on R&D expenditure and investigates how the organization capital affects the choice of R&D expenditure from the perspective of the overall internal situation of the enterprise. The organization capital of an enterprise may have an impact on R&D expenditure in two ways. Firstly, high level of organization capital implies excellent management ability, it may promote innovation and increase R&D investment (Attig and Cleary, 2014). Secondly, an enterprise with higher level of organization capital has lower employee turnover rate and will be more willing to invest in long-term projects, which can promote R&D of firms and increase R&D spending (Carlin et al., 2012). Subsequently, firms with high level of organization capital have higher operation efficiency, thus achieving better business operation level. Firms with higher level of organization capital have better management and corporate information systems. Therefore, firms invest more in R&D programs have higher level of organization capital. Based on the above analysis, our research attempts to explore the relationship between internal environment of the enterprise and R&D expenditure.
Our sample consists of China’s listed manufacturing firms included in CSMAR in the period 2007 to 2015. Using the fixed effect model and the propensity score matching model to examine the impact of the organization capital of the enterprise to the R&D expenditure of the enterprise. The conclusions are as follows:
First, the organization capital of an enterprise is positively related to the R&D expenditure. The result indicates that with the increase of the organization capital of firms also invest more in R&D programs. Because the high level of organization capital represents higher management ability, lower employee turnover rate and higher output efficiency, those are inevitably contributed to the firm R&D and innovation, and its R&D expenditure will increase accordingly. From a realistic point of view, firms can improve the level of organization capital by improving management ability, promote employees’ ability and sense of belonging will indirectly increasing the R&D expenditure rate of the enterprises.
Second, using the propensity score matching model, this paper tests and finds the enterprises with high level of organization capital have higher R&D expenditures ratio than those with low level of organization capital. It means that the relationship between organization capital and R&D expenditures is still positively related after controlling other variables which can affecting R&D expenditures. Because enterprises with higher organization capital have higher input and output efficiency, higher management level, and higher proportion of R&D investment. For listed manufacturing enterprises in China, non-state-owned enterprises have higher R&D expenditure rates than state-owned enterprises, which reflects that non-state-owned enterprises pay more attention to R&D investment of enterprises. In non-state-owned enterprises subsample, the enterprises with higher organization capital have higher R&D expenditure rate, but this effect is not significant in state-owned enterprises. This might because the operation and management of China’s state-owned enterprise is subject to strict control, and their investment decisions are not entirely determined by thefirm, including research and development expenditures. Besides, the objective of state-owned enterprise is mixed while the objective of listed non-state-owned enterprise is to maximize enterprise value and the distinct objectives result indifferent behavioral pattern.
Based on the theory and empirical evidence of organization capital and enterprise R&D expenditure, this paper examines the connection from a new perspective. The results have practical significance for corporate governance and enterprises reform, especially after the propose of Supply-side Structural Reform in 2015. Improving the products quality and production efficiency have positively substantial effect on corporate reform in China. Furthermore, the increase of organization capital of an enterprise helps to improve the production efficiency and it can promote the investment in research and development of the enterprise. Therefore, the requirement of Chinese enterprises to improve efficiency from the aspects of production management and organization management, and enhance their input of organization capital, in order to produce competitive products more efficiently.