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A tale of two major emerging markets: How corporate financialization and financial risk shape R&D investments in India and China

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  • Varsha, Madheshiya
  • Prasanna, Krishna

Abstract

Asian powerhouses India and China have witnessed a surge in R&D investments in recent years in the race for technological leadership. Utilizing dynamic R&D models based on the Euler equation framework and firm-level panel data, this research investigates the impact of corporate financialization on R&D intensity among non-financial firms in India and China from 2011 to 2023. Our findings highlight heterogeneous firm-level behaviour between the two countries. In India, financialization appears to foster R&D investments, indicative of a reservoir effect where investments in financial assets provide a financial buffer to fuel innovation. In China, however, the relationship indicates a crowding-out effect. Additionally, financial risk plays a crucial role in moderating these effects. Interaction effects show that lower financial risk reduces the reliance on financial assets for R&D funding in India and mitigates the negative impact of financialization in China. Heterogeneity analysis indicates that the presence of financial constraints and the firm's institutional ownership significantly impact the financialization-R&D relationship. The robustness tests also validate our findings. Our findings provide valuable insights for policymakers aiming to foster innovation-driven growth in emerging economies.

Suggested Citation

  • Varsha, Madheshiya & Prasanna, Krishna, 2026. "A tale of two major emerging markets: How corporate financialization and financial risk shape R&D investments in India and China," Emerging Markets Review, Elsevier, vol. 73(C).
    • Handle: RePEc:eee:ememar:v:73:y:2026:i:c:s1566014126000415
    DOI: 10.1016/j.ememar.2026.101477
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    JEL classification:

    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • O32 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Management of Technological Innovation and R&D
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies

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