Market or government: who plays a decisive role in R&D resource allocation?

Purpose - The purpose of this paper is to empirically investigate the impact of equity market valuation and government intervention on the research and development (R&D) investments of listed companies in China and their relationship. Design/methodology/approach - Using a manually collected R&D database in the period 2007–2015, this paper constructs a sample of 6,595 firm–year observations and applies the methods of pooled OLS regressions to examine the effects of market valuation and government intervention on corporate R&D expenditures. Findings - This paper finds that market valuation enhances corporate R&D investments, but there is no evidence that government intervention may significantly affect the R&D investments. Government intervention also decreases the sensitivity of corporate R&D investment to stock price, which implies that government intervention weakens the promotion of market mechanism to corporate R&D investment. Furthermore, these effects are stronger in the non-state-owned firms and the non-regulated industries. Practical implications - This study suggests that the functional borders of markets and government should be reasonably defined and markets play a decisive role in resource allocation to improve corporate innovation and national innovation. Originality/value - This paper provides a micro view of the relationship between market and government at the stage of transitional economy in China as well as directions for further research on the relationship between stock prices and corporate investments.