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The role of R&D and corporate governance in Korea: IT firms versus non-IT firms

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Abstract

Recent economic development in Korea was mostly driven by companies in the IT sector. Also, it is widely argued that R&D investment has a positive impact on firm value, especially for IT firms. In this paper, we analyze how R&D investment has contributed to the growth of Korea’s economy by examining the effect of R&D investment on firms’ market value, measured as Tobin’s Q, and investigate whether this effect is different between firms in the IT sector and firms in the non-IT sector. We also account for the effect of another major change experienced by Korean firms: changes in corporate governance structure. We find that for firms in the IT industry, higher R&D investment coupled with high foreign ownership results in higher firm valuation.

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Notes

  1. For example, in 2010, the growth in the employment rate of IT sector in Korea was 6.2 %, compared to the overall employment growth rate of 1.2 % in Korea [41].

  2. Studies include Eberhart et al. [17], Anderson et al. [2], Amir [1], Lev and Sougiannis [37].

  3. For example, see Kim and Kim [28] and Yang [48].

  4. Shleifer and Vishny [45] define corporate governance as "the ways in which finance suppliers assure themselves of getting a return on their investment."

  5. There are also a few studies such as Loveman [38] and Berndt and Morrison [4] which show contradicting results.

  6. Results are qualitatively similar if we use the next year’s Tobin's Q instead of current year’s measure.

  7. The current regulation imposed by the Korean government is that listed companies should have at least one quarter of its board members as outside members. Furthermore, firms with asset size of greater than 2 hundred billion Korean won must have at least half of its board members as outside members, with a minimum of 3 outside board members.

  8. We also check for the possible multicollinearity using the variance inflation factor (VIF). Usually, the criterion for multicollinearity is that the largest VIF is greater than 10 (some choose a more conservative threshold value of 30). In all specifications of our model, the VIFs do not exceed 2. So we conclude that there is not much concern about multicollinarity.

  9. The effect of foreign investors itself (without regard to R&D investments) is also positive, suggesting that foreign investors provide are value adding in general. With regard to foreign investors' specifically helping R&D investment in increasing firm value, their positive role is found only in the subsample of firms in the IT industry.

  10. There is anecdotal evidence that firms, in order to satisfy the outside board member requirement, brings in outside board members which are de-facto insiders (personally connected to the managers either through birthplace or having attended the same school), or those who are close to the current government, in which case can help protect the firm from external threats (For example, refer to Lee [35]).

  11. Furthermore, since our data is unbalanced panel owing to newly-listed firm and delisted firm during the sample period, we use Im-Pesaran-Shin (IPS) panel-specific unit-root test. We choose the number of lags by minimizing the AIC criterion, subject to a maximum of 5 lags. The only exception to this is the proportion of foreign investors. For this variable, because of the small number of observations, we confine the maximum lags to 2 for this variable. The results indicate that panel-specific time series of Tobin’s Q, R&D, outside board, log of asset size, foreign investors, growth, and leverage variables all reject the null hypothesis of unit roots at 1 percent level. So, we can conclude that our samples are stationary. Furthermore, we include year dummies in all specifications. So, it is unlikely that some non-stationary series of variables would deteriorate our statistical results.

  12. We also examine the effects of 3-year accumulated R&D on firm values and find qualitatively similar results.

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Authors and Affiliations

  1. Business School, Korea University, Anam-dong, Seongbuk-gu, Seoul, 136-701, Korea

    Joon Ho Hwang & Min-Su Kim

  2. Department of Business Administration, Seoul National University of Science and Technology, Kongneung-gil 138 Nowon-gu, Seoul, 139-743, Korea

    Se-Hak Chun

Authors
  1. Joon Ho Hwang
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  2. Min-Su Kim
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  3. Se-Hak Chun
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Correspondence to Se-Hak Chun.

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Hwang, J.H., Kim, MS. & Chun, SH. The role of R&D and corporate governance in Korea: IT firms versus non-IT firms. Inf Technol Manag 14, 29–41 (2013). https://doi.org/10.1007/s10799-012-0142-9

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