Product market competition and a firm’s R&D investment: New evidence from Korea

Abstract

This study aims to examine the effect of product market competition on a firm’s investments in research and development (R&D) and how this effect varies depending on the firm’s internal corporate governance. This study employs the regression method to analyze the association between product market competition and a firm’s R&D investment. Since product market competition works effectively as an external corporate governance mechanism that reduces agency problems and information asymmetry, this study hypothesizes that a competitive product market promotes R&D investments. Using 11,560 firm-year observations of Korean listed firms for 2001–2020, this study finds a positive association between product market competition and R&D investment. The result also shows this association is more pronounced for firms with weak internal corporate governance mechanisms. Furthermore, additional analysis shows that the effect of product market competition on a firm’s R&D investment is stronger for firms in the low-tech industry. This study provides new insights on the inconclusive association between product market competition and a firm’s R&D investment and practical implications that product market competition drives firms to invest in R&D.