Demand Volatility, Business Environment and Firm’s R&D Behavior: Evidence From Yangtze River Delta and Pearl River Delta

This paper firstly builds a theoretical model about firm’s R&D decision-making. Facing the exogenous demand volatility, different firms may have different behavior patterns of R&D investment decision, which is mainly caused by firm’s different business environments. Then we choose Yangtze River Delta and Pearl River Delta for empirical analysis by using China’s industrial enterprises data in 2005-2007, in order to study how demand volatility influences firm’s R&D behaviors in these two regions. The results show that the firms in Pearl River Delta are more sensitive than those in Yangtze River Delta. That is, under the similar external demand volatility, firms in Pearl River Delta are neither willing to do R&D nor willing to increase the input of R&D. However, demand volatility does not affect firm’s R&D behaviors in Yangtze River Delta. Finally, the paper shows that better business environment in Yangtze River Delta leads to the different R&D behavior patterns of firms in these two regions.