Innovation is a source of long-term economic growth for a country [1
]. During the current era of continuous economic downturn, countries worldwide are emphasizing the importance of innovation for economic growth. The importance of innovation lies in not only promoting the rate of economic growth but also improving the quality of economic growth, including reduction of energy consumption and alleviation of pollution [2
]. Sustainability is regarded as one of the key drives for innovation. Sustainability oriented firms are more likely to generate product and process innovations [6
]. Many modern managers now believe sustainability is not a burden which fails to generate immediate financial gains but an opportunity to lower input cost, gain a competitive edge, raise status, and ultimately generate more revenue through superior product and services. Therefore, it is crucial to obtain a better understanding of how innovation is affected by firm level characteristics such as cost behaviors in order to strengthen the bond between sustainable development and innovation.
However, innovation is deemed high-risk economic activity. A high rate of failure indicates that firms tend to be cautious when it comes to investing in research and development (R&D). Company-specific characteristics and external environments also pose a major influence on firms’ R&D strategies. For example, Wang et al. discovered that both policy and market uncertainties drastically hinder R&D investment [7
]. However, policy uncertainties only affect politically connected firms, whereas market uncertainties affect nonpolitically connected firms. Han et al. suggested that compared with male CEOs, female CEOs considerably improve the incremental and radical innovation behavior of firms [8
]. Gender culture has positively facilitated the correlation between CEO gender and corporate incremental innovation behavior. Zhou et al. stated that firms’ corporate social responsibility is positively correlated with their investment in technological innovation [9
]. However, this effect is strongly dependent on the environment in which the firms are located.
Innovation incurs R&D expenditure. The invested R&D expenditure becomes a sunk cost if innovation fails; this can severely burden the firm. In other words, the cost characteristics of firms are likely to affect their R&D behavior. Anderson et al. suggest that compared with change in sales [10
], firms’ cost adjustment demonstrates asymmetric features. Costs increase more when sales increase than they fall when sales decrease by an equivalent amount; this phenomenon is called cost stickiness. Since the advent of the concept of cost stickiness, numerous studies have examined the causes of and factors contributing to cost stickiness. Other than Weiss [11
], Ciftci et al. [12
], Baumgarten et al. [13
], and Rouxelin et al. [14
], who have examined the effect of cost stickiness on analysts’ forecasts, profitability, and unemployment rate, few authors have focused on the economic consequences of cost stickiness.
This paper expands the scope of the existing literature by investigating the effect of cost stickiness on R&D expenditure and by examining firms’ innovation behavior from the perspective of asymmetric adjustment. On the basis of data from Chinese listed companies in the manufacturing sector between 2007 and 2015, three conclusions are drawn, as detailed in the following paragraphs.
First, firms with high cost stickiness are more cautious about R&D investment and spend less on R&D because it is much more difficult to reduce costs than to increase costs. On average, with one standard deviation added to the mean, R&D expenditure over total asset and that over total sales are reduced by 2.7% and 2.2%, respectively.
Second, the higher the risks encountered by firms, the more prominent the dampening effect of cost stickiness on R&D expenditure. Because innovation carries external risks, firms are more cautious regarding innovation and R&D [7
]. Therefore, risks may aggravate the dampening effect of cost stickiness on R&D expenditure. To accommodate different types of risks, this paper examines the influence of macroeconomic, industry, and firm-level risks. The results demonstrate an enhanced dampening effect of cost stickiness, regardless of the risk category.
Third, Weiss indicated that different types of cost stickiness exist [11
]. Initially, Anderson et al. only focused on SG&A costs; subsequent studies extended this to cost of goods sold (COGS) and total cost stickiness [10
]. The effects of different types of cost stickiness are likely to vary. On the basis of SG&A cost stickiness, this paper further investigates the effect of COGS and total cost stickiness on R&D expenditure. The results reveal that only SG&A cost stickiness exhibits a significant dampening effect on R&D expenditure, whereas the other two cost stickiness types demonstrate no significant effects.
The contribution of this paper to the existing literature is twofold. First, it extends the research on the economic consequences of cost stickiness. Studies examining the effect of cost stickiness on profitability [13
], analysts’ forecasts [11
], and unemployment [14
] have only focused on cost and profit aspects, but very few have explored other key aspects of firm behavior. This paper examines the relationship between cost stickiness and innovation by integrating risks associated with innovation failure and sticky cost behavior, thus broadening the scope of research on the economic consequence of cost stickiness.
Second, this paper enriches the research on influential factors toward innovation. Innovation is essential in maintaining long-term competitiveness. Because of the risk of innovation failure, weighing the input and output of R&D is crucial. Firms potentially cut back on R&D expenditure with increasing risks [7
]. At the same time, the risks associated with the irreversibility of input cost compels the firms to be more cautious about R&D investment [17
]. Cost stickiness will aggravate such risks. The empirical results of this paper show that asymmetry of input cost inhibits R&D investment. Thus, our research not only extends existing literature on the effect of influential factors such as risks, the institution, and environment on firms’ innovation [7
], but also contributes to theories on the effect of firms’ cost characteristics on investment [17
The remainder of this paper is structured as follows. The literature review and hypothesis development are presented in Section 2
, research design is described in Section 3
, empirical results are presented in Section 4
, and finally, the conclusion is stated in Section 5
Innovation is crucial to a country’s long-term economic development. Because of high failure rates associated with innovation, firms must tread lightly to balance certain costs and uncertain future gains. Such technique is almost artisan.
Real options theory states that risks cause firms to postpone their investment and reduce R&D expenditure. Building on studies confirming the effects of macroeconomic, policy, and firm-level risks on decision making, we examine the influences of sticky cost behavior on R&D development. Cost stickiness amplifies the risks firms encounter when they face difficulties in reducing costs in response to a decrease in demand. Therefore, firms become more cautious about investing in R&D. Our empirical results reveal that on average, with one standard deviation added to the mean, Chinese listed firms’ R&D expenditure over total asset and that over total sales are reduced by 2.7% and 2.2%, respectively. The dampening effect of cost stickiness is simultaneously aggravated with increasing macroeconomic, industry, and firm-level risks, as a result of the risk overlapping effect.
On the basis of data from Chinese listed manufacturing firms, this paper expands the research on firms’ innovation from the perspective of firms’ cost behavior. Notably, the cost behavior of firms is affected by the institutional environment in which they are located. For example, in the 2008 version of the Labor Law of the People’s Republic of China, the minimum wage clause has clearly increased the cost stickiness of firms. This paper focuses only on Chinese firms, and factors such as law, political, and institutional environment at the national level may be neglected. However, this limits the generalization of our conclusion to some extent. Thus, a future analysis encompassing samples and institutional factors at a transnational level may further enrich and expand the findings of this research.