Management Control and Innovative Activity

This paper discusses the different incentives of managers versus firm owners to invest in innovative activities. Economic theory proposes different incentives in owner-led firms and manager-controlled firms. In the first place, the impact of risk on the incentive to invest in R&D are compared for the capital-led and the managerial firm. On the one hand, the risk of dismissal for the manager implies less innovative investment than in the "traditional" capital-led firm. On the other hand, innovative activity will most likely increase the growth rate and therefore the size of a firm. This is a positive stimulus for R&D in the managerial firm. We present empirical analyses on the determinants of the R&D intensity of firms. We use a sample of 3,978 observations from the Mannheim Innovation Panel. Aside of more conventional measures like competition, size and other variables, we explain the R&D activities by the leadership and the ownership of firms. On the one hand, we distinguish manager-led firms from owner-led firms. On the other hand, we hypothesise that the R&D expenditures of manager-led firms depend on the control exerted. We take that into account by a Herfindahl index of capital dispersion. We estimate Tobit models and it turns out that the management control has a significant impact on the R&D intensity of firms. If the capital shares are widely dispersed and the managers are thus not intensively controlled by the owners, they invest more into R&D than others. In contrast, there is no significant difference in R&D intensities among owner-led firms and managers who are strongly controlled.

Czarnitzki, Dirk and Kornelius Kraft (2000), Management Control and Innovative Activity, ZEW Discussion Paper No. 00-68, Mannheim.