Navigating investment choices: determinants of corporate investment strategies in Japan’s nonfinancial sector

Japan is renowned for its cutting-edge technology industry and significant investment in research and development (R&D). However, Japanese nonfinancial enterprises face challenges that affect their investment decisions, including high capital costs and stringent regulations. This study uses pecking-order theory to assess the determinants of investment strategies. We meticulously followed inclusion criteria and collected data through purposive sampling from Thomson Reuters Eikon DataStream, focusing on 304 nonfinancial institutions listed on the Tokyo Stock Exchange for the 18 years from 2006 to 2023. The primary estimation methods employed to analyze the relationships between the study’s variables were the augmented mean group estimator and the two-step generalized method of moments. The study found that interest rates had a negative and significant impact on both R&D and capital expenditures (CAPEX). In addition, while the tax rate negatively and significantly influenced R&D, it had a positive and significant effect on CAPEX. The investigation also revealed that total debt and stock prices positively and significantly impacted both R&D and CAPEX. Further, the moderating relationship between firm size and interest rates showed a positive and significant effect on R&D but a negative and significant impact on CAPEX. Companies should consider restructuring their activities to minimize tax liabilities by allocating investments to areas with more favorable tax rates or implementing tax-efficient financing arrangements.