FACTORS INFLUENCING RESEARCH & DEVELOPMENT EXPENDITURES OF MANUFACTURING COMPANIES OF BANGLADESH

The objective of this study is to identify the factors that have an impact on research and development expenditures of manufacturing companies of Bangladesh. Data for the year 2013 to 2016 were used to accomplish the purpose. Total 32 companies have been selected from seven manufacturing industries. All of these companies are listed in DSE. Panel data analysis has been employed to examine the data. Dependent variable of this study is R&D expenditures intensity whereas independent variables are classified into two categories. They are firm specific factors and corporate governance factors. The results indicate that experienced firms are intended to spend more on R&D. Gross profit and firm size have significant negative association with R&D intensity. Leverage has significant impact on R&D of sample firms with positive coefficient. Number of independent directors in the board has significant negative correlation with firm’s R&D expenditures. Sample size is a key limitation of this study. So far most of the empirical study considers either firm specific factors or corporate governance factors. This study is an attempt that takes into account both kind of factors. It will provide a glimpse of what factors can determine the R&D expenditure except industry type.


Introduction
Research and development is one of the momentous segment of a company's business activities.
Search plays lead role for organizational evolvement and prosperity (Chen & Miller, 2007).
Conducting research in proper way accelerate the desired success. Scientific research leads to technological innovation as well as economic growth (Fleming & Sorenson, 2004). R&D not merely generate new information, it also helps a firm to make the best use of present information (Cohen & Levinthal, 1989). And these are the activities by which a company survives in long run.
Undoubtedly, competition is increasing in today's business world. Because of intensive competition level, the performance of a company on the arena of innovation becomes crucially important.
Basically firms are differentiated by the way of their search from others (Katila & Ahuja, 2002).
Most of the times innovation becomes major causes for getting positive economic benefit (Kane, Ubilava, & Xu, 2007). Investment in research and development is quite risky in nature and involves a long period of time (Chen & Hsu, 2009). Though, R&D activity has the strong potentiality to bring positive changes, it is also fraught with risk and so can be the cause of magnitude loss (Greve, 2003).
Bring to light on the influencing factors of research and development may be in great help to understand it properly and reducing related uncertainty.
The aim of this study is to ascertain factors that influence R&D expenditures of manufacturing companies. In this paper, factors are divided in two categories. One category contains firm specific factors and another contains corporate governance factors.
Technological change has been given less importance in developing countries in comparison to developed countries (Subodh, 2002). While economic growth of a country is decided by the improvement in technology (Ferdaous & Rahman, 2017). Investment in R&D can bring technological change.
The economy of Bangladesh is growing significantly. A growing economy must have to focus on its manufacturing sector to continue this progress. Manufacturing sector need to make investment on R&D for improving the business besides competing successfully in the market. Determining influencing factors of R&D will smooth this whole activity.
The notion of R&D expenditure is not very old in the context of Bangladesh (Ferdaous & Rahman, 2017). Yet many companies do not incur any R&D expenditure. It is one of the major obstacles for enhancing economic growth. Some particular industry requires heavy investment on R&D. Before enhancing R&D expenditures, the influencing factors should be identified. That will be helpful for manufacturing firms to understand the situation and ameliorate their R&D activity.
The result of the study will help the policy maker to understand the situation more clearly and take decision about incurring research & development expenditure. Some particular features make this paper isolate from others. Many previous literatures took place on a particular industry such as family business group (Min & Smyth, 2015), electronic industry (Chen H. L., 2012), agribusiness companies (Kane et al., 2007), pharmaceutical industry (Mahlich & Roediger-Schluga, 2006)  One study took place in Bangladesh by Ferdaous and Rahman (2017) (Goyer, 2001;Honore, Munari, & Potterie, 2015 ;Othman & Ameer, 2009). Becker and Pain (2008)  In recent time, R&D has been given significant weight by policy makers and researchers for ensuring long term economic progress (Becker & Pain, 2008). R&D helps a company to increase its wealth and attain sustainable development. A company can enjoy advanced quality and quantity of production because of successful innovation that results from R&D activity (Khan & Khattak, 2014). The challenge regarding competition faced by the firms at micro level (Yanghua, 2010) can be conquered by R&D activity.
R&D activity is notably uncertain in nature and intensive in sunk cost (Driver & Guedes, 2012). According to agency theory, managers are often risk averse and may be decided to choose the option that is better for himself only (Panda & Leepsa, 2017). Board monitoring may encourage risk aversion propensity of managers which will lead to decrease the investment on R&D (Guldiken & Darendeli, 2016). It is quite difficult for corporation to predict future outcome precisely which subsequently originate a complex situation in relation to R&D investment. Action taken by independent board might be in help of reducing this complexity and prioritize increasing of innovative capacity (Kor, 2006). Investment in R&D activity helps manufacturing firms to enhance competitive capability.
As R&D performs more responsibility to commence new and innovative project in comparison to other function (Nohria & Gulati, 1996), without this it would be cumbersome to indemnify sustainable development.
Manufacturing sector is such significant that it is account for a major portion of business sector R&D (Becker & Pain, 2008).  R&D is positively related with firm size (sales) though increment is not linear to size. After a threshold, R&D start to decrease if firm size continue to increase.

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Export share in total sale, public support, being part of bigger firm have significant positive relationship with dependent variable.

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National share variable is negative and significant to the dependent variable.

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Foreign ownership share has negative association for 2008 and significant positive association for 2013. (Othman & Ameer, 2009) Malaysia 228 firm-year observations Dependent variable: R&D intensity (R&D expenditure over sales and R&D expenditure per employee as a proxy for R&D intensity) Independent variable: Stock option, Slack (ratio of selling, general and administrative expenses to sales), tenure of CEO, experience of CEO (dummy variable), R&D capacity, sales growth, subsidiary, total sales to average total assets, total cash flow to sales ratio, ratio of total debt to total assets, tax exemption (dummy variable)  SLACK and sales growth have significant positive influence on R&D spending of the firms.

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Subsidiary has significant negative association  CEO characteristics, tax exemption have no significant effect on R&D expense. Stock option and total debt to total asset variable are insignificant to dependent variable.  Objective: Norms, Total innovation, process innovation, product innovation, cost barriers, knowledge barriers, market: incumbents, market: demand uncertainty)

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No positive relationship between size (number of employee) and R&D intensity.

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New firms are involved with R&D more than older firms.

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Public fund has positive effect on R&D.

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Firms giving importance to process innovation, invest large amount in technological activities.

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After a certain point, R&D spending rises more than proportionately with firm size.

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Both export and outward investment have significant positive association with dependent variable.

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Profit margin has significant negative impact on R&D.

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Engineering and chemical industries have higher R&D intensity in comparison to other industries. (Honore et al., 2015) E u r o p e a n Countries Except limitation of severance pay, other independent variables have significant negative association with dependent variable at 5% probability threshold.

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Board score and audit committee score are positively significant at 10%. Intangible asset became positively significant at 1% probability. As family ownership has negative association with dependent variable, so it discourages long term R&D investment.

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The firms having high family ownership, more independent director, separate CEO and chairman encourage R&D investment. Size (sales) has positive impact on innovation for full sample size.

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In case of high tech industries, market concentration and export intensity has significant positive impact on innovation.

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Profitability significantly increases innovative activity in low tech industries. (Min & Smyth, 2015) S o u t h Korea

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Though the association with board meeting frequency is positive, but it is insignificant.

2) Age
Which organization has long-term experience, they are engaged in more innovative operation and have better scheme of generating new product and process (Subodh, 2002 H1: There is a significant association between age and R&D intensity

3) Gross Profit
Innovation activities are taken place so that firms can enjoy enhancing profits (Pamukcu, 2003). Profit margin can act as an indicator of competitive environment that an entity has to face in different time (Kumar & Saqib, 1996). In their study, they enunciate that profit margin helps to raise internal fund, which subsequently leads the possibility of having positive relationship with innovative operation.
Subodh (2002) found positive and significant association between R&D and profit margin in electronics industry, but it was insignificant in drug and pharmaceutical industry.
H2: There is a significant association between gross profit and R&D intensity

4) Firm Value
There is a relationship between firm's value and some strategic decision made by the firm like investment in R&D. Literature mentioned above support this. Firm size determines whether the firm has the ability to invest in innovation. Firm size is used in several previous studies such as (Chen & Hsu, 2009;Lee & Hwang, 2003 ;Min & Smyth, 2015).

5) Leverage Ratio
Pursuing innovativeness require to show lower leverage ratio (Yanghua, 2010). Equity financing get more preference to debt financing in case of high asset specificity like R&D investment (Williamson, 1988

8) Independent Director
A board having independent director is considered to be more stakeholders oriented and ensure stakeholder's interest (Goyer, 2001

9) Board Payment
If payment to board member is fixed, and there is no other incentive then the board member will not be interested to engage in any risky activities (Min & Smyth, 2015). As well as they will not be interested to think about R&D expenditures. Moreover, shareholders will expect better performance from the board if the board get higher payment. Min & Smyth (2015) used this variable in their study and depict that to meet the higher expectation, the board members will be more cautious about their performance.  year. Average R&D intensity represent a small portion of sales are R&D expenditures.
Maximum expenditures of R&D is 2.59% of sales.

Regression Analysis
The result of hausman test (appendix RDINT has significant and positive relationship with Age. If one unit of age increases, RDINT will increase by 0.0368. It is observed that the most experienced firms spend much amount in Research and Development expenditures as the relationship between the age and R&D intensity is positive for this study. This result is consistent with past study (Lall, 1983;Subodh, 2002). Gross profit is significantly associated with R&D but this association is negative. An increase of one unit gross profit will decrease RDINT by 0.1172. Value of t is -2.06 and p value is 0.043 which is less than 5%.  We can explain that the profitable firms don't want to spend much on R&D as they are already profitable and it is obvious that less profitable firms will spend much on their Research and Development to make them profitable. Kumar and Saqib (1996) found negative and significant association between gross profit and R&D activity at 5% level.
Firm value is measured by natural logarithm of assets. This independent variable has negative and significant coefficient with dependent variable. This result differs from some previous literature where significant positive association was obtained between firm size and R&D (Lee & Hwang, 2003 ;Min & Smyth, 2015).
The findings show that large firms spend less amount in R&D. Comparatively small firms prefer to spend much on R&D.
Posterior independent variable is leverage ratio. This study found significantly positive association between this independent variable and the only dependent variable (Research and Development expenditure). Value of t is 11.79 while coefficient is 0.1518. It indicates that the higher the debt of the firm, the higher the R&D expenditure is. Several previous literatures found negative association between leverage and R&D (Chen & Hsu, 2009 ;Min & Smyth, 2015). But outcome of this study doesn't find any evidence about negative relationship.

Coefficient between R&D and independent
director is -.0696, which apprises negative association between these two variables.
As t value is 2, this represents significant relationship. Kor (2006) also found negative association between outsiders on the board and R&D investment, but it was insignificant.
Apart from this, three independent variable namely gender diversity, board of director and board meeting frequency have positive association with R&D but that is not significant.

Relationship between board payment and R&D
is neither positive nor significant.