Chang-Yang Lee

A simple theory and evidence on the determinants of firm R&D

This paper derives a simple, but informative, model of firm R&D to figure out key factors that determine firm R&D effort. The model suggests a demand-pull, technology-push theory of R&D by showing that a firms profit-maximizing R&D expenditure is determined jointly by both demand-side factors and technology-side factors. The former includes demand size (firm sales) and consumer preference over quality and price and the latter includes R&D cost structure or the production-cost effect of product R&D and firm-specific technological competence. In addition, the model shows that other things being equal, the stock of exogenous technological knowledge, including the firms previously accumulated technological knowledge, relevant to current R&D which is negatively related with current R&D effort. An empirical analysis of firm R&D intensities and technological capabilities of more than 1600 firms in nine industries across six countries provides supportive evidence for the theory. Further, the theory implies that R&D intensity or the R&D-to-sales ratio is independent of firm size unless firm size affects technological competence and that given consumer preference and R&D cost structure facing all firms in the same industry, the distribution of firm-specific technological competence among firms determines the distribution of firm R&D intensities within the industry.

Firm Density and Industry R & D Intensity: Theory and Evidence

By deriving a formal model of industry R & D that identifies factors influencing industry R & D intensity, this paper first suggests firm density, defined as the inverse of average firm sales or simply the number of firms divided by industry sales, as a measure of market structure that is appropriate in explaining industry R & D intensity. The model shows that the cost structure of R & D, consumer preference over quality and price, the appropriability of R & D, firm density, and the average level of firm R & D intensity jointly determine industry R & D intensity. In particular, firm density has a positive relationship with industry R & D intensity, implying that firms in higher firm-density industries feel fiercer competitive pressure and thus engage more intensively in R & D. An empirical analysis of panel data on industry R & D activities of Korean manufacturing industries during the period 1991–1996 provides supportive evidence for the predictions of the model including the positive relationship between firm density and industry R & D intensity. The theoretical model and the empirical results are also consistent with the recent survey of U.S. corporate R & D activities by the U.S. Department of Commerce and the National Science Foundation (1999).

Advertising, Its Determinants, and Market Structure

This study derives a formal model of firm advertising behavior and applies it to the industry level to figure out the relationship between advertising and market structure. The firm advertising model shows that both consumer preference andfirm-specific advertising competence jointly determineprofit-maximizing advertising intensity. At the industry level, advertising intensity is represented multiplicatively by consumer preference and a measure of market structure, which reflects the joint distribution of the levels of advertising competence and market shares among firms. The new market structure measure suggests that those single-dimensional measures of market structure such as seller concentration and the Herfindahl index are inadequate in explaining interindustry differences in advertising intensity, and that the long-debated advertising-concentration relationship differs depending primarily on the appropriability of advertising. An empirical analysis of 426 five-digit Korean manufacturing industries shows that an inverted U-shaped relationship between the Herfindahl index and industry advertising intensity is observed for consumer goods industries but a lazy J-shaped relationship for producer goods industries.

A simple model of R&D: An extension of the Dorfman-Steiner theorem

This paper extends the seminal Dorfman-Steiner (American Economic Review, 44, 826–36, 1954) theorem by putting underlying structures on the determination of market share and on the production of quality or technology. The model developed in this paper yields a demand-pull, technology-push theory of R&D, where the profit-maximizing R&D intensity (i.e., the ratio of R&D expenditure to sales) is determined jointly by consumer characteristics, represented by the elasticities of consumer value with respect to price and quality, and firm-specific technological competence or simply R&D productivity, measured as the R&D elasticity of quality or technological output.

The relationship between R&D concentration and industry R&D intensity: A simple model and some evidence

This study aims to demonstrate that the concentration (or distribution) of firm R&D intensities within an industry is closely related to the overall R&D intensity of the industry. Unlike the well-studied relationship between sales concentration, or market structure, and industry R&D intensity, the relationship between the concentration of R&D in an industry and its overall R&D intensity has not been explored before. We present a simple model of industry R&D intensity, in which R&D concentration, R&D appropriability, and industry-wide technological opportunities jointly determine industry R&D intensity. In particular, we show that, all else being equal, the more skewed the distribution of firm R&D intensities, the higher the level of industry R&D intensity. We use a six-year panel dataset on the R&D intensities, R&D appropriability, and technological opportunities of four-digit SIC Korean manufacturing industries during the period 1991–1996.

Technological Regimes and Firm Survival

This paper investigates whether the type of technological regime moderates the effects of entry timing, entry size (i.e., initial resources), and active (post-entry) learning on firm survival. By analyzing a unique dataset of newly founded Korean manufacturing firms, we find that the effects of the factors influencing firm survival differ substantially across technological regimes. Specifically, entry size has the greatest positive effect on firm survival under the regime characterized by low technological opportunity and high R&D appropriability, under which opportunities for disruptive innovation are stagnant and the advantages of initial resources are more likely to persist. Post-entry active learning through R&D, on the contrary, has the greatest effect on firm survival under the regime of high technological opportunity and low R&D appropriability, under which active learning through contemporaneous R&D effort is more crucial for firm survival than initial resource advantages mostly due to the possibility of creative destruction.

Technological Capability, Agglomeration Economies and Firm Location Choice

Jo Y. and Lee C.-Y. Technological capability, agglomeration economies and firm location choice, Regional Studies. This paper argues that a firms ability to produce and absorb technological knowledge, or technological capability, influences its choice of location among regions characterized by different types of agglomeration. This paper found that geographically bounded knowledge externalities, one of the forces that attract firms into a particular location, have a differential effect on firm location choice across firms depending on the level of their technological capability: for firms with low technological capability knowledge externalities from co-located competitors, or competitive specialization, have a stronger positive effect on their location choice, while for firms with high technological capability knowledge externalities from co-located firms from related and complementary industries, or complementary specialization, more strongly influence their location choice. Furthermore, the differential effect of agglomeration economies between low- and high-capability firms is more pronounced in industries with strong non-legal appropriability, implying that firms can use their location choice as a strategic tool for dealing with the spillovers of tacit knowledge.

What determines firms’ R&D intensity in business groups with cross-ownership structures?

Abstract This paper examines the impact of group-controlling shareholders’ interests on the R&D decision of group-affiliated firms in business groups with cross-ownership structures, especially with regard to the impact of control-ownership disparities or cash-flow rights. We show that R&D intensity across group-affiliated firms, in business groups with cross-ownership structures, is higher when control-ownership disparities are low or when group-controlling shareholders have higher cash-flow rights. Particularly in publicly listed firms, we find that the cash-flow rights of group-controlling shareholders are one of the most important determinants of the R&D intensity for group-affiliated firms.