The Relationship among Governance Structure, R & D Investment and Performance of Pharmaceutical Enterprises

Table of Contents

1. Foreword

2. Literature review and hypothetical development
2.1 Corporate governance structure and R & D investment intensity
2.1.1 Nature of stock rights
2.1.2 Equity concentration
2.1.3 Equity balance degree
2.1.4 Board size
2.1.5 Proportion of independent directors
2.1.6 two-job setup
2.1.7 Executive incentive
2.2 The intensity of R & D investment and enterprise performance

3. Test models, research samples and data
3.1 Sample selection and data sources
3.2 Variable definition and Model Construction
3.3 Descriptive statistics of variables
3.4 Correlation analysis of variables

4. Empirical results
4.1 Corporate governance structure and R & D investment intensity
4.2 The intensity of R & D investment and enterprise performance

5. Robustness test

6. Conclusion and suggestion

7. References

Abstract: Objective: To study the relationship between the governance structure and the input intensity of R & D investment of pharmaceutical enterprises, and to check the lag effect of R & D input on the performance. Methods: The data of the balanced panel of 133 medical-listed enterprises from 2009 to 2016 were taking as samples, the regression analysis was performed by using the STATA13.0 software. Results: In the aspect of the ownership structure, the state-owned control has a negative effect on the R & D investment intensity, and the equity concentration degree and the equity balance degree are positive. In terms of the governance of the board of directors, the proportion of the two-level and independent directors is positively affecting the strength of R & D and the scale of the board of directors has a negative effect. In that case of executive motivation, the share power incentive and salary incentive do not play the desired positive role. The lag effect of R & D investment on enterprise performance has verified. With the passage of time, the relationship between R & D investment and enterprise performance has gradually changed from significant negative to significant positive. Conclusion: Based on the research results, some suggestions are put forward to provide empirical evidence for optimizing the internal governance structure of pharmaceutical enterprises and improving the efficiency of R & D.

Keywords: Pharmaceutical enterprises; Corporate governance; Investment in R & D; Enterprise performance; Hysteresis effect

1.Foreword

Pharmaceutical industry is a high-tech industry, listed by the state as a strategic emerging industry and the "made in China 2025" key development areas. The 13th five-year Plan of the pharmaceutical industry focuses on promoting innovation, pointing out that in order to realize the upgrading and development of the pharmaceutical industry during the 13th five-year Plan, the key is to implement the innovation-driven development strategy, and innovation must be placed at the core of the overall development of the pharmaceutical industry. Strengthen the technical strength as the strategic fulcrum of building a powerful pharmaceutical country; strengthen the innovation ability of pharmaceutical industry [[1]]. Under this background, the majority of pharmaceutical enterprises should make great efforts to perfect the innovation mechanism of enterprise-oriented, market-oriented, industry-university-research combination, and grasp the opportunity, increase R & D investment, speed up the pace of innovation.

In order to deal with the complex and changeable industry environment and stand out from the fierce industry competition, pharmaceutical enterprises not only need to pay attention to technological innovation and R & D investment, but also need to improve the internal governance structure of the company. The corporate governance structure refers to the structural institutional arrangement in order to achieve the best operating performance of the company, and the corporate ownership and management rights are based on trust responsibility to form mutual checks and balances. Therefore, the corporate governance structure affects the decision-making of technological innovation, then affects the efficiency of R & D investment and innovation activities, and finally affects the performance of enterprises [[2]]. However, due to the professional nature of the business content of pharmaceutical enterprises, the current chairperson and general manager and other business executives are all the internal governance structure of the company adjusted and optimized by professional managers. Therefore, there is stillroom for improvement of the internal governance structure of the current enterprise.

Taking pharmaceutical listed enterprises as research samples, this paper studies the influence of each variable of corporate governance structure on the intensity of R & D investment, and tests the lag effect of R & D investment on enterprise performance by using the method of empirical analysis. In order to optimize the internal governance structure of pharmaceutical enterprises and improve the efficiency of innovation research and develop to provide empirical evidence.

2. Literature review and hypothetical development

2.1 Corporate governance structure and R & D investment intensity

Review the relevant literature (Xiang Chaojin et al., 2003 [[3]],Zhou Jian et al., 2012[[4]],Lu Tong et al., 2014[[5]],Chen Lilin et al., 2015 [[6]],Ye Chen Gang et al., 2016 [[7]],Feng Taozhu et al., 2017 [[8]],Zhang Min et al., 2017[[9]],Xie Haijuan et al., 2018 [[10]]), Most of them choose different indicators to measure corporate governance structure from three aspects: equity structure, board governance and executive incentive. This article selects the nature of equity, equity concentration, equity balance on behalf of the ownership structure; the size of the board of directors, the proportion of independent directors, the establishment of two positions to represent the board of directors Governance; executive equity incentives and executive compensation incentives represent executive incentives. Strive to build more perfect corporate governance structure variables.

2.1.1 Nature of stock rights

The state-owned enterprises are controlled by the state, their business objectives are diversified and restricted by many non-economic objectives, the motivation of technological innovation is greatly weakened, the subject of property rights is false, the subject of interest is vague, and it is difficult to focus on the long-term development of the enterprise. Because of the multi-layer principal-agent relationship, it is difficult to form an effective supervision mechanism, and it is easy to form the insider control, thus avoiding the risk. Reduce investment in innovation. Kornai et al., think that budget soft constraints will restrain the enthusiasm of managers of state-owned enterprises to carry out efficient operation and management of enterprises [[11]]. Zhang Qixiu pointed out that the state's informal intervention in state-owned enterprises will have a negative impact on the business decision-making and strategic implementation of the enterprises. It will also damage R & D investment conversion efficiency [[12]]. Many scholars have shown that state-owned holding companies have little investment in innovation and lack of efficiency compared to private property holding companies [[13]]. Based on this, this paper proposes the following assumptions:

H1：State-owned holding has a negative impact on the intensity of R & D investment.

2.1.2 Equity concentration

Moderate concentration of equity is beneficial to technological innovation of enterprises. Major shareholders pay attention to the long-term stable development of enterprises, and have the ability and motivation to take risks, so they can effectively stimulate and monitor the technological innovation activities of enterprises, increase R & D investment in order to obtain high returns and the long-term profitability of enterprises. In addition, minority shareholders pay more attention to short-term returns; there are speculation and "free ride" behavior. Based on this, this paper proposes the following assumptions:

H2：Equity concentration has a positive impact on the intensity of R & D investment.

2.1.3 Equity balance degree

The mechanism of stockholding checks and balances means that many large shareholders control each other, restrain and supervise each other, share the control and decision-making power of the company together, and avoid "one share being the only big one". Equity checks and balances are beneficial to reduce agency conflicts, restrict the behavior of large shareholders encroaching on the interests of small and medium shareholders, and make management decision-making accord with the maximization of enterprise value. It is beneficial to restrain insider control, to form a good internal governance mechanism, to improve the scientific nature of business decision-making, to carry out R & D activities, and to realize the long-term objectives of enterprises. Based on this, this paper proposes the following assumptions:

H3：Equity balance degree has a positive impact on R & D investment intensity.

2.1.4 Board size

The board of directors is the main decision-maker in business activities [[2]], therefore, it also plays an important role in setting R & D investment. The expansion of the board of directors can bring in more experts from different academic backgrounds and working experiences to improve the scientific nature of decision-making, but at the same time it will also result in a decline in the efficiency of communication among members and even a "free ride" phenomenon [[14]]. It is not conducive to the rapid and efficient decision-making in the competitive market, thus reducing the innovation efficiency and R & D intensity. Based on this, this paper proposes the following assumptions:

H4：Board size has a negative impact on R & D investment intensity.

2.1.5 Proportion of independent directors

Independent directors have different professional backgrounds and skills experience, reflect the voices from the outside world, can broaden the vision of internal directors, improve the quality of innovation decision-making, effectively deal with the uncertainty in the external environment, and promote innovation and change. Many scholars have shown that the investment level of innovation R & D in enterprises with higher proportion of independent directors is significantly higher than that of enterprises with lower proportion of independent directors [[15]]. Based on this, this paper proposes the following assumptions:

H5：The proportion of independent directors has a positive effect on R & D investment intensity.

2.1.6 two-job setup

The principal-agent theory plays a dominant role in the theoretical research of chairman and general manager. According to the theory, the principal-agent relationship arises between the shareholders who hold the ownership of the company and the general manager who holds the control right of the company, and then the agency cost is generated [[16]]. If the chairman and the general manager are the same person, when dealing with the complex and changeable industry environment, they can give full play to the leader's spirit of risk-taking, respond quickly and efficiently, and avoid missing opportunities due to factors such as communication and consultation. Then flexible R & D decision-making, improve the performance of enterprises. Based on this, this paper proposes the following assumptions:

H6：If the chairman and the general manager are the same person, it may have a positive impact on the intensity of R & D investment.

2.1.7 Executive incentive

Incentive mechanism is an important content of corporate governance. Executive incentive mainly includes two aspects: equity incentive and compensation incentive. No matter which incentive mode, it is beneficial to ease the agency conflict, promote the convergence of managers' rights and interests with shareholders' rights and interests, so that executives can focus on the long-term benefits of the enterprise and have the powerful motivation to improve the technological innovation ability of the enterprise. Zahra et al. [[17]], Miller et al. [[18]] think that managers who own equity are more willing to take risks, which is beneficial to promote investment in technological innovation. Lin et al have proved that the annual salary of general manager is significant positively correlated with the intensity of investment in R & D [[19]]. Xu Jinfan and others pointed out that The more motivated managers are, the more motivated they are to invest in technological innovation [[20]]. Lu Tong et al. [[5]], Peng Zhong et al. [[21]] found that the proportion of management ownership was positive correlated with R & D investment. Liu Wei and other empirical evidence proved a significant positive correlation between executive ownership and R & D spending [[22]]. Based on this, this paper proposes the following assumptions:

H7a：Executive equity incentive has a positive impact on R & D investment intensity.

H7b：Executive compensation incentive has a positive impact on R & D investment intensity.

2.2 The intensity of R & D investment and enterprise performance

Innovation is the inexhaustible motive force for the development of pharmaceutical enterprises, and innovation ability is the core competitiveness of pharmaceutical enterprises. Most of the previous studies showed that there was a significant positive correlation between R & D investment intensity and corporate performance. Many found that R & D investment promoted the growth of sales revenue and corporate performance. And the greater the R & D intensity, the faster the performance improvement [[23]]. Johnson & Pazderka points out that the fundamental purpose of R & D investment is to gain competitive advantage that is different from other enterprises by enhancing the innovation ability of the enterprise. Ultimately improving performance [[24]] .Aghion et al.'s findings are the same as those of Aghion et al. Aboody et al pointed out that by increasing R & D investment, enterprises can introduce innovative products, improve technological processes, and ultimately significantly improve performance. Jefferson et al., through empirical estimates, found that the rate of return on R & D expenditure is much higher than the rate of return on fixed asset investment [[27]]. Chinese scholars have also carried out a lot of research work (Wu Yanbing et al., 2011 [[28]], Lu Guoqing et al., 2011 [[29]], Zhang Qixiu et al., 2012 [[12]], Wu Xiang, 2015 [[14]], Li Wei et al., 2016 [[30]]), they all confirmed the positive effect of R & D investment intensity on enterprise performance.

According to Enterprise Accounting Standard No. 6-Intangible assets, the expenditure in the research stage is all included in the current profit and loss when it occurs, and the expenditure in the development stage can recognize as intangible assets only when certain conditions met. Therefore, R & D investment has the characteristics of profit lag, that is, increasing R & D investment may have a negative impact on current performance, while R & D success will have a positive impact on long-term performance. This lag effect will increase the uncertainty of the innovation process, thus affecting the allocation of innovation resources and economic benefits of enterprises [[31]]. Based on this, this paper proposes the following assumptions:

H8：The current R & D investment intensity has a negative impact on the current performance and a positive impact on the long-term performance.

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