Financial Determinants of Corporate R&D Investment in Korea

This paper investigates the relationship between corporate investment in R&D and finance. By using panel data on Korean manufacturing firms between 1999 and 2008, we find that R&D investment is sensitive to fluctuations in internal cash flow and that debt is more important than equity in financing R&D expenditure. This empirical result supports the traditional theory of financing hierarchy. In relation to equity ownership, the empirical result shows that ownership concentration and foreign ownership positively affect R&D investment, but institutional ownership does not show any significant effect on investment. This study synthetically analyzes the relation between finance and investment by simultaneously considering corporate finance, equity ownership structure, macroeconomic environments and the institutional setting of Korea.