Do country or firm-specific factors matter more to R&D spending in firms?

Abstract To what extent can firm, industry- and country-level factors explain firm-level R&D spending? Using a comprehensive dataset, which consists of 94,178 firm-year observations covering 42 countries and spanning 1981–2013, we examine this question by capturing multiple dimensions of the market and institutional characteristics. Our findings suggest that firm, industry- and country-level determinants jointly have the maximum explanatory power. More importantly, firm- and industry-level determinants have higher explanatory power than country-level determinants. We also show that the effect is similar for countries with weaker and stronger institutional scores related to R&D and for industries that are R&D intensive. These results are robust to adopting alternative empirical specifications of R&D intensity and correcting for missing R&D values. Our study has strong policy implications that show when international firms are investing in R&D related to FDI, they need to focus more on their own organisation and capital structures in the host country based on how the project is managed internally.