Economic relevance and determinants of R&D capital in different financial systems

This paper investigates a firm's investments in research and development (R&D) capital in different financial systems. This study examines both country-specific and firm-specific factors in the creation of a firm's R&D capital. The economic relevance of the estimated R&D capital in different financial systems is examined by associating the ratio of estimated R&D capital to the difference between the market and book value of equity (unrecorded goodwill) with different firm-specific characteristics. The results indicate that the ratio of the firm's R&D capital relative to its unrecorded goodwill is significantly higher in bank-based than market-based financial system. Different firm-specific determinants like past profitability and growth of the firm significantly explain the estimated R&D capital of the firm in both financial systems. The effects of past profitability and growth on the R&D capital are stronger in bank-based than market-based financial system, which highlights the role of bank-based financing over market-based financing in the firms' investments in R&D capital.