Market power and R&D investment: the case of China

2021 ◽  
Author(s):  
Xiaohua Sun ◽  
Fang Yuan ◽  
Yun Wang
Keyword(s):  
Market Power ◽  
Small Firms ◽  
Market Competition ◽  
Industry Concentration ◽  
Alternative View ◽  
Large Firms ◽  
Industry Level ◽  
Depth Analysis ◽  
The Impact ◽  
D Investment

Abstract This article presents an in-depth analysis of market power and its impact on firm research and development (R&D) investment in China. Two opposing theories have been proposed in the literature. The first, due to Schumpeter, suggests that monopoly power has a positive effect on firms’ propensity to innovate hence their investment in R&D. The alternative view, first proposed by Arrow, suggests that firms invest in R&D in order to escape competition, and thus market competition stimulates innovation. In testing these theories, prior studies have measured market power in different ways. Some use the so-called Lerner index, which measures the profit margin of a particular firm. Others use measures of industry concentration, for example, the Herfindahl index. This article tests the competing theories using a sample of 300,095 Chinese manufacturing firms in 29 two-digit manufacturing industries. We unify the two measures of market power, using a hierarchical linear model, to determine whether industry-level measures add power to specifications based on firm-level markups alone. We find, first, that firms are less likely to carry out R&D activities as their market power intensifies. The effect is nonlinear: firms with higher markups spend even less on R&D than a linear specification predicts. This finding supports Arrow’s theory and contradicts Schumpeter’s theory. Second, for the sample as a whole, the impact of industry-level concentration is negligible. However, when we break the sample into large, medium, and small firms, industry concentration has a significant effect on large and medium-sized firms but no impact on small firms. Thus, large firms with high markups in concentrated industries spend less on R&D than large firms with high markups in less concentrated industries. We interpret this as further evidence in support of the escape competition theory: less concentrated industries are more competitive, forcing the leaders to invest more heavily on R&D.

COMPETITION-STABILITY RELATIONSHIP IN DUAL BANKING SYSTEMS: EVIDENCE FROM EFFICIENCY-ADJUSTED MARKET POWER

2021 ◽  
pp. 1-24
Author(s):  
MUDEER AHMED KHATTAK ◽  
OMAR ALAEDDIN ◽  
MOUTAZ ABOJEIB
Keyword(s):  
Market Power ◽  
Financial Stability ◽  
Banking Sector ◽  
Market Competition ◽  
Policy Implications ◽  
Islamic Banks ◽  
Banking Competition ◽  
Precise Measure ◽  
Conventional Banks ◽  
The Impact

This research attempts to explore the impact of banking competition on financial stability employing a more precise measure of market power. It was found that Islamic banks are less stable and are enjoying lower market power. The analysis shows that higher market competition makes the banking sector vulnerable to defaults, supporting the “competition-fragility view”. This research finds no difference in the relationship for Islamic banks indicates that Islamic banks might be involved in traditional banking activities as conventional banks. The results are consistent and robust to different estimation approaches and subsamples. This research carries regulatory and policy implications.

Industrial Research and Firm Size, Survival, and Growth in American Manufacturing, 1921–1946: An Assessment

1983 ◽  
Vol 43 (4) ◽  
pp. 953-980 ◽  
Author(s):  
David C. Mowery
Keyword(s):  
Firm Size ◽  
Small Firms ◽  
Firm Growth ◽  
Industrial Research ◽  
Large Firms ◽  
Research Activity ◽  
Growth And Survival ◽  
Survival And Growth ◽  
The Impact ◽  
The Relationship

The literature on the development of American industrial research suggests that during the twentieth century large firms “dominated” industrial research, and reaped the majority of the benefits from such activity. This paper utilizes new data to analyze both the relationship between firm size and research employment and the impact of research activity on firm growth and survival during 1921–1946. The results suggest that large firms were no more research-intensive than were small firms during the 1921–1946 period. Research activity significantly enhanced the probability of firms' survival among the ranks of the 200 largest manufacturing firms during 1921–1946. Research employment also improved the growth performance of both large and small firms during 1933–1946.

A Perceptual Measure of Innovation Performance: Firm-Level Evidence from Turkey

2017 ◽  
Vol 14 (06) ◽  
pp. 1750038 ◽  
Author(s):  
Derya Findik ◽  
Berna Beyhan
Keyword(s):  
Factor Analysis ◽  
Small Firms ◽  
Innovation Performance ◽  
Large Firms ◽  
Firm Level ◽  
Process Innovations ◽  
Significant Difference ◽  
Process Oriented ◽  
Product And Process ◽  
The Impact

This paper aims to introduce a qualitative indicator to measure innovation performance of Turkish firms by using firm-level data collected by Turkish Statistical Institute (TURKSTAT) in 2008 and 2009. We propose a new indicator to measure the innovation performance which is simply based on the perception of firms regarding to the impacts of innovation. In order to create performance indicators, we conduct a factor analysis to group the firms’ perceptions on the impacts of innovation. Factor analysis gives us product and process-oriented impacts of innovation. There are significant differences among product innovators, process innovators and firms engaged in both product and process innovations with respect to their perceptions on product and process-oriented impacts of innovation. Among these three groups, product- and process-oriented impacts provide a highest value for the firms that perform both product and process innovations. As far as the link between firm characteristics and the impact of innovation is considered, there is a significant difference between small and large firms with respect to their perceptions on product-oriented impact of innovation. While product-oriented impact is larger for small firms, large firms focus more on process-oriented impact. Anova results also indicate that perceptions on process-oriented impact significantly differ among exporter firms, domestic market-oriented firms and firms being active in internal and external markets. Process-oriented impact generates results in favor of exporting firms.

scholarly journals Tracing the Impact of Bank Liquidity Shocks: Evidence from an Emerging Market

2008 ◽  
Vol 98 (4) ◽  
pp. 1413-1442 ◽  
Author(s):  
Asim Ijaz Khwaja ◽  
Atif Mian
Keyword(s):  
Financial Distress ◽  
Small Firms ◽  
Emerging Market ◽  
Credit Market ◽  
Large Firms ◽  
Liquidity Shocks ◽  
Political Ties ◽  
Nuclear Tests ◽  
The Impact ◽  
Do So

We examine the impact of liquidity shocks by exploiting cross-bank liquidity variation induced by unanticipated nuclear tests in Pakistan. We show that for the same firm borrowing from two different banks, its loan from the bank experiencing a 1 percent larger decline in liquidity drops by an additional 0.6 percent. While banks pass their liquidity shocks on to firms, large firms—particularly those with strong business or political ties—completely compensate this loss by additional borrowing through the credit market. Small firms are unable to do so and face large drops in overall borrowing and increased financial distress. (JEL E44, G21, G32, L25)

The impact of industry concentration on the market’s ability to anticipate future earnings

2016 ◽  
Vol 24 (4) ◽  
pp. 443-475 ◽  
Author(s):  
In-Mu Haw ◽  
Bingbing Hu ◽  
Jay Junghun Lee ◽  
Woody Wu
Keyword(s):  
Stock Returns ◽  
Market Power ◽  
Information Transfer ◽  
Positive Impact ◽  
Product Market ◽  
Industry Concentration ◽  
Firm Level ◽  
Content Type ◽  
Future Earnings ◽  
The Impact

Purpose The existing literature has established the importance of industry concentration in explaining firm performance and information environments. However, little is known about whether and how industry concentration affects investors’ ability to anticipate future earnings. This paper aims to investigate this query by identifying and testing two channels, product market power and intra-industry information transfer, through which industry concentration affects the informativeness of stock returns about future earnings. Design/methodology/approach The paper measures the informativeness of stock returns about future earnings by the future earnings response coefficient (FERC)). This study estimates the FERC using a firm-level sample from 38 economies. Findings The authors find that industry concentration significantly enhances investors’ ability to predict future earnings. Further tests show that both product market power and intra-industry information transfer contribute to explaining the positive association between industry concentration and the FERC, with the former playing a more salient role. Finally, the authors show that a country’s effective competition law attenuates the positive impact of industry concentration on the FERC by weakening the economic impact of the two underlying channels. Originality/value This study contributes to the growing literature on the price-leading-earnings relation, industry concentration and international corporate governance.

Do Chinese dairy firms have market power? an estimation of market power with price heterogeneity

2016 ◽  
Vol 8 (2) ◽  
Author(s):  
Qing Guo ◽  
H. Holly Wang ◽  
Yongjun Chen
Keyword(s):  
Market Power ◽  
Design Methodology ◽  
Small Firms ◽  
Econometric Model ◽  
Dairy Industry ◽  
Large Firms ◽  
Dummy Variables ◽  
Eastern Area ◽  
Competitive Industry ◽  
Western Area

Purpose The purpose of this paper is to investigate market power in dairy industry in China. Specifically, we analyze market power for different firm size, locations of region and city empirically. Design/methodology/approach We estimate the market power by controlling the unobserved price heterogeneity. The econometric model was developed through a typical production function. We added three dummy variables to differentiate firms of different sizes, at urban or rural locations, and in east or other regions, according to the characteristics of the dairy industry. A sample including 511 observations were used to do the regression. Findings Our results show that Chinese dairy industry as a whole is a competitive industry in general，while the large firms have gained considerable market power. The firms locate in the eastern area grow slower than firms locate in the middle and western area. Originality/value The authors believe that this is the first study to analyze the market power in China’s dairy industry by controlling the unobserved price heterogeneity. Dairy is usually thought to be competitive, while in our paper we found that large firms can exercise market power while small firms operate in a competitive market.

scholarly journals An Examination Of The Economic Impact Of Pension Rate Reductions On Future Pension Expense, Earnings, And Cash Flows: A Simulation

2011 ◽  
Vol 1 (7) ◽  
Author(s):  
Alan I. Blankley ◽  
Philip G. Cottell ◽  
Richard H. McClure
Keyword(s):  
Small Firms ◽  
Pension Plan ◽  
Cash Flows ◽  
Pension Plans ◽  
Large Firms ◽  
Asset Return ◽  
Future Earnings ◽  
Economic Climate ◽  
The Future ◽  
The Impact

In this paper, we develop a two-period analytical model of pension cost, which allows us to simulate pension expense and the associated earnings impact. These estimates are important because they provide information to the market, and because they are useful in estimating future cash flows or for other analytical purposes. This is especially true now, because the economic environment has deteriorated to a point that many investors perceive increased uncertainty with respect to pension plans and the effect they have on future income. Some plan sponsors have not been faced with pension plan losses for over a decade or longer, having enjoyed reduced or eliminated funding holidays as a result of high returns to pension plan assets. Given the current economic climate, however, these results (boosts to earnings due to pension credits and reduced or eliminated funding requirements) may change abruptly. In fact, several authors in the popular financial press have speculated on the impact of such fundamental changes in pension assets, liabilities and estimates. We simulate the potential results for two periods in the future based upon percentiles drawn from a sample of 1,116 firms taken from Compustat. We compute projected pension expense for the 25th percentile firm, the median firm, and the 75th percentile firm by varying the discount rates, expected rates of return, and actual asset return assumptions. Our results indicate that while the pension expense effect is large in both periods across small, mid-sized and large firms, large firms show the greatest increase in pension expense. Interestingly, however, the earnings impact is the smallest for large firms in both periods, and is not material in period one for both large and mid-sized firms. It is material for small firms. Firms with small pension plans appear to have the greatest earnings drag both one and two years into the future. In period two, all firms face significantly greater expense and earnings reductions, although again, smaller firms face the greatest impact. In addition, all firms face significantly increased cash funding requirements in order to prevent funding ratios (plan assets scaled by pension liabilities) from deteriorating. These results suggest not only future earnings reductions form pension rate changes, but also a potential cash flow impact as well.

Internationalization and performance: evidence from Chinese firms

2018 ◽  
Vol 12 (1) ◽  
pp. 19-34 ◽  
Author(s):  
Chao Zhou
Keyword(s):  
Firm Size ◽  
Small Firms ◽  
Manufacturing Firms ◽  
Research Database ◽  
Large Firms ◽  
Chinese Firms ◽  
Content Type ◽  
The Impact ◽  
Overseas Subsidiaries ◽  
A Share

Purpose This paper aims to test the internationalization–performance relationship based on data of Chinese firms and the impact of firm size on the internationalization–performance relationship. Design/methodology/approach This paper uses overseas subsidiaries as a percentage of total subsidiaries to measure the degree of internationalization. As the overseas subsidiaries and total subsidiaries data of Chinese A-share listed firms are not available in any existing databases, the author hand-collected information on subsidiaries of Chinese A-share listed manufacturing firms from their annual financial reports during 2001-2014. The basic accounting and market information is collected from the China Stock Market and Accounting Research Database. This paper finally gets 535 manufacturing firms. Findings The empirical results suggest that the internationalization–performance relationship is W-shaped in overall samples, but varies with firm size. Specifically, the internationalization–performance relationship is W-shaped in small firms and U-shaped in large firms. Research limitations/implications Future studies based on unlisted Chinese firms or other measurement of internationalization may provide further understanding of the internationalization–performance relationship. Practical implications Policymakers should help small firms prepare a long-term internationalization strategy, giving more support for small firms in the first and third phases of internationalization and helping them to reach the second and fourth phases. Policymakers should also pay more attention to limit the aggressive internationalization behavior of large firms. Originality/value This study provides new evidence for the internationalization–performance relationship by using the unique longitude sample from China and the unique measurement of internationalization. We also highlight the importance of firm characteristics in the examination of internationalization–performance relationship, which provides a potential explanation for previous mixed evidence.

Profitability and Financial Leverage: Evidence from a Quasi-Natural Experiment

2021 ◽  
Author(s):  
Davidson Heath ◽  
Giorgo Sertsios
Keyword(s):  
Capital Structure ◽  
Market Power ◽  
Treatment Period ◽  
Small Firms ◽  
Natural Experiment ◽  
Adjustment Costs ◽  
Large Firms ◽  
Financial Leverage ◽  
Trade Off ◽  
The Relationship

The relationship between profitability and leverage is controversial in the capital structure literature. We revisit this relation in light of a novel quasi-natural experiment that increases market power for a subset of firms. We find that treated firms increase their profitability throughout the treatment period. However, they only transiently reduce financial leverage, gradually reverting to their preshock level. Firms respond differently according to size with large firms gradually adjusting their leverage toward a new target and small firms reducing it. The patterns are broadly consistent with dynamic trade-off models with both fixed and variable adjustment costs. This paper was accepted by Gustavo Manso, finance.

Product market competition, market munificence and firms’ unethical behavior

2019 ◽  
Vol 13 (2) ◽  
pp. 468-488 ◽  
Author(s):  
Jingbo Yuan ◽  
Zhimin Zhou ◽  
Nan Zhou ◽  
Ge Zhan
Keyword(s):  
Market Power ◽  
Unethical Behavior ◽  
Market Competition ◽  
Product Market ◽  
Market Concentration ◽  
Product Market Competition ◽  
Short Term ◽  
Content Type ◽  
The Impact ◽  
The Relationship

Purpose This paper aims to examine the effect of product market competition on firms’ unethical behavior (FUB) in the Chinese insurance industry and to further explore the boundary conditions of the main effects. On the basis of China’s commercial foundation, the study constructs a conceptual framework of FUB by drawing from the perspective of horizontal competition. Design/methodology/approach Data were collected from 52 property insurance firms at the branch level observed over the six-year period, 2011-2016. Within this framework, market power and market concentration were used to describe product market competition at firm and industry levels, respectively. The moderating effect of market munificence was analyzed to reveal the theoretical boundaries of the main effect. By drawing upon cost–benefit analysis and social network theory, the study used negative binomial model and Poisson model to quantitatively examine the relationship. Findings The relationship between product market competition and FUB is curvilinear. Especially at the firm level, market power exhibits a U-shape relationship with FUB; at the industry level, market concentration exhibits a U-shape relationship with FUB. In addition, market munificence positively moderates the impact of firm’s market power on FUB, whereas, market munificence negatively moderates the impact of industrial market concentration on FUB. Research limitations/implications This paper explored a new type of unethical behavior that concerns consumers or the third party by emphasizing horizontal competitive contexts; it also provides a better understanding of the FUB–financial performance relationship from the perspective of competition. The moderating effects suggest that when the cause of FUB is different (market power vs market concentration), firms may make opposite ethical choice. However, the sample is from a single industry; it will be fruitful to further verify these findings in other industries such as the manufacturing sector. Moreover, the definition of FUB is confined to explicit forms such as participation or collusion but there is no way to measure the implicit forms of FUB. Practical implications First, the governance of FUB should not only focus on the firms themselves, but also take into account the industrial market structure. Second, proper use of governance measures for FUB can increase firms’ benefits from “compliance with the law”, enticing firms to decrease FUB. The third, firms with weak market positions, facing fierce competition, should not be involved in FUB for short-term benefit; indeed, a low-cost strategy can be adopted as the dominant competitive strategy. While, in cases of highly concentrated market structure, firms should strive to avoid involvement in FUB through collusion with other rivals. Social implications As it is a very common phenomenon that firms in competitive relationships may adopt FUB toward third parties or consumers, this trend has become a hot topic in the economic and social development in China. The study’s conclusions reveal that a more proactive and ambitious ethical decision is desirable for all kinds of firms; moreover, firms should make a rational choice between “short-term interest” and “long-term survival”. When firms identify the compliance of business ethics as an opportunity to differentiate themselves and perceive the benefits of decreasing FUB as outweighing the costs, the level of FUB will be inhibited, and social welfare will increase. Originality/value The primary contribution of this research resides in identifying product market competition as a previously unexplored predictor of FUB, thus revealing the dark side of product market competition. In addition, nonlinear relationships between product market competition and FUB indicate that situations of competition exert an important influence on FUB both at the firm and industry level. This paper’s conclusion provides a more meticulous theoretical explanation for FUB. This research demonstrates that the traditional ethical framework is not sufficient to explain FUB in a horizontal competitive context. Indeed, resource constraints and competitive pressures should also be considered.

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