Sources of Finance and In-House R&D: A Study of Electronic Firms in India

The study attempts to examine the association between sources of finance and R&D decision of electronic firms operating in India. Based upon the availability of financial information relevant to our study, the random effects estimation is performed for a sample of 101 electronic firms obtained from the CMIE Prowess database for the time period 2002 to 2015. The price-cost margin turns out to be an important determinant of R&D expenditure and R&D intensity. Following the extant literature, the sensitivity of investment decision to an internal source of finance indicates the presence of financing constraints. Given the risk associated with R&D projects, the government may provide tax subsidy since the cost of outside finance is high for such investments. The significance of cash holdings indicates that firms deploy cash holdings for R&D smoothing. As a major portion of R&D expenses is made as payments to skilled manpower, firms tend to smooth their R&D expenses. Among the sources of external finance, access to equity finance is important for R&D. The small start-up in this sector with insufficient reserves and assets may not have access to external finance. Hence, their R&D decision turns out to be sensitive to external equity financing. Tobin’s q is found to be positively related to R&D investment suggesting the possibility of R&D investment by firms envisaging growth opportunities. Firm size captured by total assets appears with a positive and significant coefficient.