By using the partial adjustment framework to examine the dynamics of firms’ adjustment toward their target R&D intensity, Yan Chen and his fellow workers found that firms do not adjust instantaneously or fully to their target R&D intensity. Furthermore, the speed of adjustment varies widely across firms.
We asked, Yan Chen, Assistant Professor at School of Business, Stevens Institute of Technology to discuss his findings.
Please describe one of the findings of your paper that was of particular interest to you.
Existing research assumes that once firms have determined their target R&D intensity, they can adjust instantaneously and fully to their target R&D intensity, regardless of their past R&D intensity.
In this study, I find that firms usually do not adjust instantaneously or fully to their target R&D intensity; they typically close half of the gap between their past and target R&D intensity in a year. Furthermore, I find that the speed of adjustment varies widely across firms; firms with more cash flows, less debt, and more new equity financing have higher speed of adjustment.
What learning points does your work offer others working in R&D management?
This study suggests that firms’ partial adjustment toward target R&D intensity can help explain why firms may fail to adapt to environmental change.
Because of partial adjustment, firms may be slow in making new R&D investments in response to environmental opportunities and pressures, hindering organizational adaptation to environmental change.
In addition, this study suggests that firms’ speed of adjustment can play important roles in shaping competitive advantage. Firms with higher speed of adjustment can promptly adjust their R&D investments, enabling them to create and sustain competitive advantage in dynamic environments. Furthermore, this study suggests that firms can increase their speed of adjustment by adjusting their capital structures.
To increase their speed of adjustment, firms need to generate more cash flows, have less debt, and obtain more equity financing.
Looking wider at the field what do you consider to be the ‘hot topics’ at the moment?
Once we start to recognize the partial adjustment of R&D investment, we may need to rethink a lot of topics that we have been studying.
One topic is the nature and sources of firm heterogeneity. Extensive research has suggested that firm heterogeneity arises from the path-dependent processes of asset stock accumulation, as firms are unable to fundamentally change their asset stocks in the short run. This study further reveals that, due to partial adjustment, firms are unable to fundamentally change their investment flows in the short run. Therefore, firms’ partial adjustment toward target R&D intensity, together with the path-dependent nature of asset stock accumulation, may help explain firm heterogeneity.
Another topic is the process of Schumpeterian competition and creative destruction. Due to partial adjustment, firms have to gradually eliminate the gaps between their target and actual R&D intensity. In dynamic environments, are firms with higher speed of adjustment better able to optimize their R&D investments in response to environmental opportunities and pressures? If so, do they have a better chance of outcompeting firms with slower speed of adjustment.
Besides capital structures, we may need to investigate what else affects firms’ speed of adjustment. Firms’ speed of adjustment can be conceptualized as a dynamic capability, and we may be able to draw on the dynamic capabilities literature to help identify ways to increase firms’ speed of adjustment.
If you were talking to a newcomer to your field of work what would you recommend they read for background (ie any key papers/books)?
Nelson and Winter’s An Evolution Theory of Economic Change lays the foundations for understanding the partial adjustment of R&D investment.
Read the paper here: Partial adjustment toward target R&D intensity