National Culture and Corporate R&D Investment

Abstract: This paper examines the relationship between national culture and corporate R&D investment behavior. Based on Hofstede's work and the cushion hypothesis, we predict that firms in East Asian countries are more likely to engage in R&D investment than are firms in Western countries because East Asian cultures are collectivistic and long-term oriented while Western cultures are individualistic and short-term oriented. We use firm-level panel data for seven countries and apply dynamic GMM methods. The regression analysis shows that R&D investment is positively sensitive to internal funds for firms in East Asian countries, but not sensitive for firms in the Western countries. The result is robust to model specification and sample splitting. Moreover, the level of financial development and the legal environment do not systemically affect the relationship between R&D investment and internal funds. We suggest that this evidence supports the hypothesis that national culture affects corporate decisions.