Abstract: Some of the academic researchers at home and abroad finds out that the diversification strategy used in the firm especially the unrelated-diversification is harmful to the performance and core competence of firms. But in the age of rapid technology change, the traditional resources-based theory of core competency faces a strong challenge. Insisting on core competency will make the firm trapped in organizational inertia. The unrelated diversification strategy means firms will enter a new industry and invest R&D on new technology. Unrelated-diversification strategy will help firms to develop a dynamic capability to adapt to the changing environment. This paper analyzes the internal process how firms’ diversification strategy influences their R&D investment through literature reviews. The enforcement of unrelated strategy will enlarge the size of firms and then change their R&D inputs decision. The multi-division structure of unrelated diversified firms means that the product division manager will be guided by short-run financial goals and then the firms’ R&D investment decision will be influenced. The diversified firm has more information advantage to use internal capital market to develop new products than that in the outside capital market. The unrelated-diversification strategy can help the firm to develop its dynamic capability to adapt to the highly changing environment through investment on new technology different from the old industry. This paper finds that unrelated diversification strategy used in Chinese firms has significantly increased the R&D expenditure based on the empirical analysis using the data collected by World Bank which investigated 12400 Chinese firms. The regression analysis is based on the interval of “the degree of diversification”. More than 90% of the sample Chinese firms’  degree of unrelated diversification is less than 5%, the coefficient between the degree of unrelated diversification and firm’s R&D　expenditure are significantly positive in the interval from 0 to 5%. This means that most of the Chinese firms have only use low-level of unrelated diversification strategy because they try to avoid the high risk to make a huge investment on an unfamiliar product. As a new industry has no relation to the existing field where the firm is located, there is no synergy effect between existing technology and new technology. The firms have to invest more on R&D at the beginning when it comes to the new industry. And the sign of coefficient is negative but there is no significant relationship when the degree of unrelated diversification is more than 5%. I also find that the history of firms and its ratio of the number of the college educated employees to the whole employees can represent the firm’s technology opportunity in the industry where the firm is located, and both these two factors can significantly increase the firm’s R&D inputs while the short-time financial bonus for CEO reduces the firm’s R&D input. The empirical analysis of this paper based on the institution attribute of the firms finds out that for both state-owned firms and non-state-owned firms in china, the unrelated diversification strategy increases the firm’s R&D inputs. The positive influence on R&D inputs in non-state-owned firms is a little stronger than in state-owned firms. The state-owned firms have more interest on both the unrelated diversification strategy and the R&D investment than the non-state-owned firms. The negative influence on R&D input from the short-term financial incentives for CEO are stronger in state-owned firms than that in non-state-owned firms; the history of firms can increase the R&D inputs for the non-state-owned firms. The debt ratio, profit rate, uncertainty of profitability has a significant positive relationship with R&D investment for state-owned firms. The technology opportunity of the industry can promote the R&D investments for both kinds of firms.

Key words: unrelated diversification, R&D intensity, manager incentives, capital structure, ownership of firms