ESSAYS IN RESEARCH AND DEVELOPMENT INVESTMENT: EVIDENCE FROM THE UK

Abstract

This thesis focuses on 3 themes and aim to shed new light on firm growth and R&D within the UK’s publicly listed firms. Firstly, we examine how R&D drives firm growth by investi-gating the relationship between R&D (investment and productivity) and firm growth. Sec-ondly, we investigate the drivers of R&D investment, and finally we investigate why innova-tion capabilities and growth opportunities decline over the time. Thus, this thesis is composed of 3 empirical chapters that have employed different econometric models to examine a sample of publicly listed firms from FTSE 350 (FTSE 250 and FTSE 100) over the period from 2003 - 2016. First, we investigate the relationship between both R&D Investment and R&D Productivity and firm growth. In this research we focus on R&D investment as a main driver of firm growth. Moreover, the study employs different measurements of firm growth includ-ing sales growth, productivity growth and employment growth to highlight the complex na-ture of firm growth. We propose and find that the relationship between growth and R&D is not straight forward but rather, it is a complex one. Our results in the first empirical chapter show that there is evidence that R&D motivates firm growth, but such a result depends on the R&D and how firm growth is defined. In the second empirical chapter, we study in more details the drivers of R&D investment. The study examines whether corporate governance, CEO characteristics and CEO compensation affect the decision to invest in R&D projects. We create a Corporate Governance Index which reflects the compliance with good govern-ance practices, and we detect a positive relation between CG index and R&D investments. In addition, the study finds that older CEOs are willing to invest in R&D projects whereas CEOs who have been in the post longer are generally less interested in R&D projects. Moreo-ver, a positive effect of CEO compensation plans on R&D investment is reported. This chap-ter examines the non-financial drivers that affect strategic decisions and points to the im-portance of good governance practices and their link in enhancing management practices, which is required to engage in R&D projects. Finally, firms become more established and ma-ture with time, leading them to focus more on managing their existing assets with less atten-tion on R&D activities. Therefore, such firms will lose their innovation capabilities (invest-ment in R&D activities) and growth opportunities over time. In the third chapter, we investi-gate why innovation capabilities (R&D Investment) and growth opportunities (Tobin’s Q) decline over time by offering an interesting theoretical stand related to firm rigidity. Firstly, we study the relationship between R&D, Tobin’s Q, and firm age. The results provide evi-dence that there is an inverse link between both firm age and Tobin’s Q on R&D investment. Secondly, we examine the association between the selected rigidity measures (investment ri-gidity and cost rigidity) and Tobin’s Q. We also report that there is a negative relationship between firm rigidity and Tobin’s Q. We also detect that older firms find it difficult to recap-ture their initial successes, although such firms are technically more efficient in managing their available resources. Older firms are also found to be less interested in expanding their invest-ments. Finally, this thesis makes several contributions as it examines R&D investment from different perspectives that have not, to our knowledge, been previously addressed. For exam-ple, we examine not only R&D investments but also R&D productivity. This is a new dimen-sion in the UK context. In addition, we propose a new Corporate Governance Index that re-flects the compliance with good governance practices and includes other under-investigated governance as well as CEO characteristics and CEO compensation. This study also introduc-es, investigates, and provides support for the rigidity hypothesis when applied to UK

Date of Award	1 Aug 2022
Original language	English
Awarding Institution	The University of Manchester
Supervisor	Ronald Ramlogan (Supervisor) & Mohammad Salehnejad (Supervisor)