Innovation is not only an important channel for enterprises to obtain excess returns (Porter, 1992), but also a key driver of sustainable economic growth in the country (Solow, 1957). Especially in the context of the current rising costs, weak export growth and trade disputes, it is crucial to the continued growth of the economy and the stable development of society. Unlike capital investment, innovation is accompanied by longer development cycles and higher uncertainty. Therefore, innovation investment and its efficiency are influenced by both the factor resources owned by enterprises and the incentives of executives. On the one hand, enterprise innovation is generally faced with financing constraints and operational risks, while diversification is conducive to the formation of the internal capital market and the knowledge spillover effect (Huang and Chen, 2011), which in turn promotes enterprises’ long-term and sustained innovation investment. On the other hand, management will also use scarce resources for expanding scale or gaining short-term profits on the basis of personal interests, thus reducing R&D investment of enterprises (Wang, et al., 2017). In addition, the " strategic” R&D investment in non-main business during the diversification (Li and Zheng, 2016) may further squeeze out innovation investment in main business. Based on the detailed data of R&D investment of Chinese listed companies from 2007 to 2015, using multiple regression methods, the empirical evidence shows that: (1) Diversification is negatively correlated with R&D, and the correlation exists only in main business, especially in state-owned enterprises (SOEs). Further, non-main business R&D is also negatively related to main business R&D, and such correlation exists only in private enterprises. (2) Strong government intervention and large promotion pressure of SOE executives strengthen the crowding-out effect of SOE diversification on main business R&D; the ownership discrimination of private enterprises’ resource strengthens the extrusion effect of non-main business R&D on main business. (3) Main business R&D investment is conducive to increasing invention patents, which is reflected in the increase of innovation efficiency. Diversification reduces innovation efficiency (which only exists in SOEs, especially in SOEs with stronger government intervention and higher promotion pressure). Non-main business R&D reduces invention patents, which is reflected in the loss of innovation efficiency (which only exists in private enterprises, especially those not supported by industrial policies). The possible contributions of this paper are as follows: (1) It not only summarizes and discusses the possible impact of diversification directly on enterprise innovation, but also further divides R&D investment into main business and non-main business, summarizing the promotion and extrusion effect of non-main business R&D on main business R&D, which explains the paradox of relevant research and enriches the existing literature. (2) In the context of China’s special system, based on the perspective of ownership differences, it reveals the " dual” innovation efficiency loss of diversification in the property rights level. (3) Based on the innovation, it reveals the specific role of diversification, and also provides a partial explanation for the existing disputes over the discount and premium of diversification. The possible policy implications are as follows: (1) There are a different way of enterprise transformation between R&D investment in main business and diversification. Combining their own resource endowments and market environment, different enterprises need to weigh and select the successful path of transformation. (2) Innovation cannot conduct without resources, so it is imperative to improve the business environment and create a favorable environment for innovation. On the one hand, we should promote the separation of the government and enterprises, reduce the government intervention on enterprises, adjust and optimize the performance system of SOEs’ executives, and continuously strengthen the internal governance and external supervision for SOEs to facilitate the innovation; on the other hand, it is vital to match innovation intentions and capabilities through the market-oriented allocation of resources, and accelerate private enterprise innovation. (3) Enterprises also need to focus on the optimal allocation of innovative assets, so that they can flow to the projects related to main business, which can improve the innovation efficiency and optimize the allocation of resources as well as promote the continuous growth of the macro economy.
The “Dual” Effect of Diversification on Enterprise Innovation
Journal of Finance and Economics Vol. 45, Issue 08, pp. 58 - 71 (2019) DOI:10.16538/j.cnki.jfe.2019.08.004
Bai J H, Wang Y, Jiang F X, et al. R&D element flow, spatial knowledge spillovers and economic growth[J]. Economic Research Journal, 2017, (7): 109-123. (In Chinese)
Feng H B, Liu S. Income tax, risk sharing heterogeneity and innovation[J]. China Industrial Economics, 2017, (8): 138-155. (In Chinese)
He Y R, Lin H T, Wang M L. Product market competition, executive incentives and corporate innovation: Based on empirical evidence from listed Chinese companies[J]. Finance & Trade Economics, 2015, (2): 125-135. (In Chinese)
Huang J, Chen X Y. Collectivized management and enterprise R&D investment: An analysis based on knowledge spillover and internal capital market[J]. Economic Research Journal, 2011, (6): 80-92. (In Chinese)
Ju X S, Lu D, Yu Y H. Financing constraint, working capital management and sustainability of enterprise innovation[J]. Economic Research Journal, 2013, (1): 4-16. (In Chinese)
Kong D M, Xu M L, Kong G W. Internal pay gap and innovation[J]. Economic Research Journal, 2017, (10): 144-157. (In Chinese)
Lu G Q, Wang Z, Zhang C Y. Research on the performance of government innovation subsidies in China’s strategic emerging industries[J]. Economic Research Journal, 2014, (7): 44-55. (In Chinese)
Li W J, Zheng M N. Substantive innovation or strategic innovation? The impact of macro industrial policies on micro enterprise innovation[J]. Economic Research Journal, 2016, (4): 60-73. (In Chinese)
Sun X H, Guo X, Wang Y. Government subsidies, ownership nature and enterprise research and development decisions[J]. Journal of Management Sciences in China, 2017, (6): 18-31. (In Chinese)
Wang H J, Cao Y Q, Yang Q, et al. Does the financialization of non-financial enterprises promote or inhibit corporate innovation[J]. Nankai Business Review, 2017, (1): 155-166. (In Chinese)
Wang L, Kong D M, Dai Y H. Promotion pressure of officials and enterprise innovation[J]. Journal of Management Sciences in China, 2018, (1): 111-126. (In Chinese)
Wu C P, Tang D. Intellectual property protection, technological innovation and enterprise performance: Evidence from listed companies in China[J]. Economic Research Journal, 2016, (11): 125-139. (In Chinese)
Wu Y B. Study on dual efficiency loss of state-owned enterprises[J]. Economic Research Journal, 2012, (3): 15-27. (In Chinese)
Xie W M, Fang H X. Financial development, financing constraints and investment in enterprise R&D[J]. Journal of Financial Research, 2011, (5): 171-183. (In Chinese)
Xu C. Research on the relationship between non-related diversification and innovation input of Chinese enterprises[J]. Science Research Management, 2016, (7): 62-70. (In Chinese)
Yang X Q, Yin X Q, Meng Q X. Which to be more diversified: Industrial-policy-supported or non-supported enterprises[J]. Economic Research Journal, 2018, (9): 133-150. (In Chinese)
Yu Y Z, Zhang S H. Urban housing price, purchase restriction policy and technological innovation[J]. China Industrial Economics, 2017, (6): 98-116. (In Chinese)
Zhu J G, Han F C, Lu Z F. Industrial policy, bank association and corporate debt financing: An empirical study based on A-share listed companies[J]. Journal of Financial Research, 2015, (3): 176-191. (In Chinese)
Akcomak S, Weel B. Social capital, innovation and growth: Evidence from Europe[J]. European Economic Review, 2009, 53(5): 544-567. DOI:10.1016/j.euroecorev.2008.10.001
Allen F, Qian J, Qian M J. Law, finance, and economic growth in China[J]. Journal of Financial Economics, 2005, 77(1): 57-116. DOI:10.1016/j.jfineco.2004.06.010
Arikan A M, Stulz R M. Corporate acquisitions, diversification, and the firm’s life cycle[J]. The Journal of Finance, 2016, 71(1): 139-194. DOI:10.1111/jofi.2016.71.issue-1
Blundell R, Griffith R, Van Reenen J. Market share, market value and innovation in a panel of British manufacturing firms[J]. Review of Economic Studies, 1999, 66(3): 529-554. DOI:10.1111/roes.1999.66.issue-3
Brandt L, Li H B. Bank discrimination in transition economies: Ideology, information, or incentives?[J]. Journal of Comparative Economics, 2003, 31(3): 387-413. DOI:10.1016/S0147-5967(03)00080-5
Brav A, Jiang W, Ma S, et al. How does hedge fund activism reshape corporate innovation?[J]. Journal of Financial Economics, 2018, 130(2): 237-264. DOI:10.1016/j.jfineco.2018.06.012
Caggese A, Cuñat V. Financing constraints, firm dynamics, export decisions, and aggregate productivity[J]. Review of Economic Dynamics, 2013, 16(1): 177-193. DOI:10.1016/j.red.2012.10.004
Chen T, Liu L X, Zhou L-A. The crowding-out effects of real estate shocks: Evidence from China[R]. Working Paper, https://ssrn.com/abstract=2584302, 2015.
Cornaggia J, Mao Y, Tian X, et al. Does banking competition affect innovation?[J]. Journal of Financial Economics, 2015, 115(1): 189-209. DOI:10.1016/j.jfineco.2014.09.001
Dundas K N M, Richardson P R. Implementing the unrelated product strategy[J]. Strategic Management Journal, 1982, 3(4): 287-301. DOI:10.1002/(ISSN)1097-0266
Keats B W, Hitt M A. A causal model of linkages among environmental dimensions, macro organizational characteristics, and performance[J]. Academy of Management Journal, 1988, 31(3): 570-598.
Khanna T, Palepu K G. Why focused strategies may be wrong for emerging markets[J]. Harvard Business Review, 1997, 75(4): 41-51.
Lin J Y, Tan G F. Policy burdens, accountability, and the soft budget constraint[J]. American Economic Review, 1999, 89(2): 426-431. DOI:10.1257/aer.89.2.426
Miller D J, Yang H S. The dynamics of diversification: Market entry and exit by public and private firms[J]. Strategic Management Journal, 2016, 37(11): 2323-2345. DOI:10.1002/smj.2016.37.issue-11
Mukherjee A, Singh M, Žaldokas A. Do corporate taxes hinder innovation?[J]. Journal of Financial Economics, 2017, 124(1): 195-221. DOI:10.1016/j.jfineco.2017.01.004
Porter M E. Capital disadvantage: America’s failing capital investment system[J]. Harvard Business Review, 1992, 70(5): 65-82.
Raut L K. R&D spillover and productivity growth: Evidence from Indian private firms[J]. Journal of Development Economics, 1995, 48(1): 1-23. DOI:10.1016/0304-3878(95)00028-3
Seru A. Firm boundaries matter: Evidence from conglomerates and R&D activity[J]. Journal of Financial Economics, 2014, 111(2): 381-405. DOI:10.1016/j.jfineco.2013.11.001
Solow R M. Technical change and the aggregate production function[J]. The Review of Economics Statistics, 1957, 39(3): 312-320. DOI:10.2307/1926047
Stein J C. Internal capital markets and the competition for corporate resources[J]. The Journal of Finance, 1997, 52(1): 111-133. DOI:10.1111/j.1540-6261.1997.tb03810.x
Tong T W, He W L, He Z L, et al. Patent regime shift and firm innovation: Evidence from the second amendment to China’s patent law[J]. Academy of Management Proceedings, 2014, 2014(1): 141-174.
Cite this article
Yang Xingquan, Li Wencong, Yin Xingqiang. The “Dual” Effect of Diversification on Enterprise Innovation[J]. Journal of Finance and Economics, 2019, 45(8): 58-71.