Research on the Determinants of R&D Expenditures : An Empirical Study on Listed Bio-pharmaceutical Companies of U.S.

Abstract: As the increase of competition levels, the ability of generating a continuous stream of innovation occupies an exceptionally important role in the development and manufacturing of companies, especially in bio-pharmaceutical industry in United States. This paper presents an empirical perspective on the nature of innovation of the U.S. bio-pharmaceutical companies. Several issues discussed here are central to a study of R&D expenditure's determinates of top listed bio-pharmaceutical companies sampling from U.S. market. It begins with the background information of innovation in overall bio-pharmaceutical sector, and then moves on to detail of R&D activities in bio-pharmaceutical industry. Next it discusses the estimated factors which influence R&D expenditures, following by previous literatures review. The purpose of this thesis is to investigate and to test financial and non-financial factors determining R&D expenditures for individual top technique bio-pharmaceutical listed firms through literature review using data for the 2001 to 2010 periods by both single variable analysis and multiple variable analyses empirically. Moreover, the further step in this study is to investigate the real relations between those factor and R&D expenditures individually and synthetically. In this way, this work helps us have a more clear understanding on the relationship between firm performance and firm R&D expenditures. More specifically, the study provides evidence on three essential issues. To answer there three questions, the paper conducts both single variables analysis and multiple variable analysis. For single variable analyses, first step is to draw scatter plots based on 97 sets of data by using MARLAB software. Following this step, to illustrate the exact correlation between the given independent variable and dependent variable (the natural logarithm of R&D), after processing data filter the paper adopt curve fitting based on varying sets of data. According to the results from this study, the conclusions obtained can be divided into two streams. First type is the one that the hypothesis get support from this study. For instance, there is a significantly positive correlation between firm size and R&D expenditures as expected. Also, just as expected, a high sales growth rate is positively correlated with R&D expenditures based on given sample. Besides, it is proved in this paper that R&Di,t-1 have a lagged effect on the R&Dit expenditures. The other type is that hypothesis cannot be proved, no significant evidence have been found or not as effective as what have been estimated in hypothesis. For example, it is not reasonable to say the R&D expenditures and operating profit margin have a positive correlation. Moreover, the lnR&Dit and cash flow to sales income rate also have no obvious correlation. According to the analyses of two multiple variable models, all six variables can be regarded as the determinants of R&D expenditures; especially the variable of firm 3 / 105 size is the major. Additionally, some interesting findings provided in the end of this study.