How does Innovation Failure Affect the R&D Expenditure?

Abstract

Abstract: Failure is an objective phenomenon in the process of innovation, and it will affect the decision-making behavior. We assume that the managers of firms will exhibit the loss aversion characteristic after innovation failure, based on the performance feedback theory and the prospect theory. This paper uses a sample consisting of listed firms from 2007 to 2017 to empirically test the impact of innovation failure on R&D expenditures. We find that innovation failure ratio is positively associated with R&D expenditures, and the government subsidies strengthen the relationship between innovation failure and R&D expenditures. We also find that after the failure of innovation, the number of patent applications increases and the unauthorized ratio of new patent applications increases. This finding further supports the research hypothesis of the paper. These results provide empirical evidence for the application of behavioral economics in innovation management.

Key words: innovation failure, the prospect theory, R&D expenditure, government subsidy

Gu Zhihui, Ma Baichao. How does Innovation Failure Affect the R&D Expenditure?[J]. Management Review, 2020, 32(9): 79-96.

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