Environmental regulation, subsidy and underperforming firms' R&D expenditure: evidence from Chinese listed companies

Abstract

Behavioural theory examines how the intensity of underperformance influences firms' strategic decisions such as research and development (R&D) investment, but inconsistent inclusions arise. Moreover, insufficient attention is paid to the effect of institutional environments. Drawing on behavioural theory and institutional theory, we argue that the level of government environmental regulation and subsidy has a positive effect on the relationship between performance feedback and R&D expenditure through intensifying perceived knowledge deficiency and alleviating resource constraints. We test these arguments with 711 firm-year observations of Chinese listed companies in 16 environmentally disruptive sectors during the period of 2008 to 2015, finding empirical support. Our study contributes to behavioural theory and R&D literature by showing that uncertain attribution of performance shortfalls and severe resource constraints can result in firms' passive R&D decisions in response to underperformance, but government regulation and subsidy can help contain this problem.