# Interest Rate Marketization, Financing Constraints and R&D Investments: Evidence from China

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## Abstract

**:**

## 1. Introduction

## 2. Literature Review and Research Hypothesis

#### 2.1. Financing Constraints and R&D Investment

**Hypotheses 1a (H1a):**

#### 2.2. Interest Rate Marketization and Financial Constraints

**Hypotheses 1b (H1b):**

#### 2.3. Ownership Structure

**Hypotheses 2a (H2a):**

**Hypotheses 2b (H2b):**

## 3. Research Design

#### 3.1. Variable Definitions

#### 3.1.1. Dependent Variable—Enterprise R&D Investment

#### 3.1.2. Independent Variable—Cash Flow and Sale

#### 3.1.3. Moderating Variable—Interest Rate Marketization and Soe

#### 3.2. Sample and Data

#### 3.3. Model Establishment

## 4. Empirical Results

#### 4.1. Descriptive Statistics

#### 4.2. Correlation Analysis

#### 4.3. Regression Result

#### 4.3.1. Regression Results Analysis

_{t}

_{−1}and Rd

_{t}is 0.02 and is significant at the 1% level, which indicates that, although the magnitude is small, the R&D investments of Chinese enterprises depend on internal cash flows. In other words, the enterprises commonly face relatively financing constraints. Therefore, Hypothesis 1a is verified. The positive and significant coefficient of Sale

_{t−1}indicates imperfect competition in the product market, in line with Laeven [63]. The coefficient of the cross term Cf

_{t}

_{−1}× Im

_{t}is −0.001, which is significant at the 10% level. From Table 3, the mean of Im is 72.35, the R&D investment-cash flow sensitivity becomes 0.01765, slightly small than 0.020, equivalent to a fall of 11.75% on average. It means that along with the promotion of interest rate marketization, the dependence of R&D investment on internal funds reduced, and the financing constraints are alleviated to a certain extent. Therefore, Hypothesis 1b is verified.

_{t}

_{−1}× Im

_{t}, the coefficient is nearly zero, and not significant, while the coefficient of the Cf

_{t}

_{−1}× Soe × Im

_{t}is significantly negative, although the magnitude is relatively small. Interest rate marketization do have a certain degree of mitigation of financing constraints for non-state-owned-enterprises, but for state-owned-enterprise, this effect is not significant. This is in line with the expectation of Hypothesis 2b.

#### 4.3.2. Robustness Test

_{t}

_{−1}and Rd

_{t}is 0.012, and it is significant at the 1% level. It shows that R&D investment depends on internal cash flows, that is, enterprises also face common financing constraints in the accelerated interest rate marketization period. Therefore, Hypothesis 1a is verified again. The coefficient of Cf

_{t}

_{−1}× Im

_{t}in model 3 is −0.004 and is significant at the 1% level. With the mean of Im

_{t}72.35, the coefficient will be 0.0106 after interest rate marketization, equivalent to a fall of 11.67% on average. This is in line with the results of total sample regression.

_{t}

_{−1}is not significant for state-owned-enterprises, while the one for non-state-owned firms is 0.364, significant at the 1% level. This result is very similar to the one of total sample regression, which means that non-state-owned enterprises do face more financing constraints. Moreover, the interaction term Cf

_{t−}

_{1}× Soe × Im

_{t}has a significantly negative coefficient 0.003, for non-state-owned-enterprises, the interest rate marketization can alleviate financing constraints of R&D investment, which is consistent with the conclusion we get earlier.

## 5. Conclusions

## Author Contributions

## Funding

## Conflicts of Interest

## References

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Primary Index | Secondary Index | Three-Level Index | Four-Level Index | Assignment or Calculation Description | |||
---|---|---|---|---|---|---|---|

Name | Weight | Name | Weight | Name | Weight | ||

Interest rate Marketization (Im) | Rate determination ways (Im1) | 0.3333 | Deposit and loan rate (Im11) | 0.6340 | RMB loan (Im111) | 0.4375 | 0 complete suppression 0–0.25 very weak marketization 0.25–0.50 weak marketization 0.50 semi-marketization 0.50–0.75 strong marketization 1 full marketization |

RMB deposit (Im112) | 0.4375 | ||||||

Foreign currency loan (Im113) | 0.0625 | ||||||

Foreign currency deposit (Im114) | 0.0625 | ||||||

Money market interest rate (Im12) | 0.1747 | Interbank borrowing (Im121) | 0.7500 | ||||

Discounted bills (Im122) | 0.2500 | ||||||

Bond market interest rate (Im13) | 0.1074 | Bond issuance rate (Im131) | 0.6000 | ||||

Bond repo rate (Im132) | 0.2000 | ||||||

Current coupon transaction rate (Im133) | 0.2000 | ||||||

Wealth product yield (Im14) | 0.0839 | Banking (Im141) | 0.5370 | ||||

Monetary fund (Im142) | 0.2047 | ||||||

Trust product (Im143) | 0.2583 | ||||||

Rate fluctuation restriction (Im2) | 0.3333 | Deposit interest rate floating index (Im21) | 0.5000 | Deposit up-floating limit (Dup) | - | Construct Euler exponential function $\frac{1}{2}\left({e}^{\frac{1}{Dup}}+{e}^{\frac{1}{Ddown}}\right)$ | |

Deposit down-floating limit (Ddown) | |||||||

Loan interest rate floating index (Im22) | 0.5000 | Loan up-floating limit (Lup) | - | Construct Euler exponential function $\frac{1}{2}\left({e}^{\frac{1}{Lup}}+{e}^{\frac{1}{Ldown}}\right)$ | |||

Loan down-floating limit (Ldown) | |||||||

Real rate level (Im3) | 0.3333 | RMB one-year deposit benchmark rate (BR) | - | - | - | Use (BR-IR) to obtain the real interest rate, and then use the fuzzy comprehensive evaluation method to construct the membership function and calculate the value between 0 and 1 as the real interest rate index | |

Inflation rate (IR) | - | - | - |

Variable Type | Symbols | Name | Definition |
---|---|---|---|

Dependent variable | Rd | R&D investment | R&D investment/total beginning assets |

Independent variable | Cf | Cash flow | Net operating cash flow/total beginning assets |

Sale | Revenue | Revenue/total beginning assets | |

Moderating variable | Im | Interest rate marketization | Construct interest rate marketization index |

Soe | ownership Dummy variable | Non-state-owned, 1; otherwise 0 |

Variables | Samples | Mean | Median | Std. Dev | Min | Max | C·V |
---|---|---|---|---|---|---|---|

Rd (%) | 6172 | 2.890 | 2.277 | 2.596 | 0.000 | 38.46 | 89% |

Cf (%) | 6172 | 4.823 | 4.597 | 10.750 | −322.400 | 103.000 | 223% |

Im (%) | 6172 | 72.350 | 75.92 | 10.740 | 55.590 | 87.660 | 15% |

Sale (%) | 6172 | 75.030 | 62.75 | 58.630 | 3.607 | 2206.000 | 78% |

Soe | 6172 | 0.693 | 1.000 | 0.461 | 0.000 | 1.000 | 67% |

Rd | Rd_{t}_{−1} | Rd^{2}_{t}_{−1} | Cf_{t}_{−1} | Im_{t} | Sale_{t}_{−1} | Own | |
---|---|---|---|---|---|---|---|

Rd | 1 | ||||||

Rd_{t}_{−1} | 0.736 *** | 1 | |||||

Rd^{2}_{t}_{−1} | 0.497 *** | 0.832 *** | 1 | ||||

Cf_{t}_{−1} | 0.211 *** | 0.089 *** | 0.056 *** | 1 | |||

Im_{t} | −0.141 *** | −0.202 *** | −0.139 *** | −0.001 | 1 | ||

Sale_{t}_{−1} | 0.209 *** | 0.048 *** | 0.002 | 0.023 | −0.193 *** | 1 | |

Own | 0.254 *** | 0.249 *** | 0.129 *** | 0.017 | −0.098 *** | −0.029 | 1 |

Total Sample | ||||
---|---|---|---|---|

Variables | Model 1 | Model 2 | Model 3 | Model 4 |

Constant | 0.173 | 0.552 | 0.231 | 1.855 *** |

(1.43) | (0.84) | (0.33) | (2.63) | |

Rd_{i}_{,t−1} | 0.828 *** | 0.828 *** | 0.831 *** | 0.832 *** |

(26.69) | (26.69) | (26.73) | (26.19) | |

Rd^{2}_{i}_{,t−1} | −0.016 *** | −0.016 *** | −0.016 *** | −0.016 *** |

(−7.25) | (−7.25) | (−7.26) | (−7.20) | |

Sale_{t}_{−1} | 0.004 ** | 0.004 ** | 0.004 ** | 0.004 ** |

(2.07) | (2.07) | (1.99) | (1.98) | |

Cf_{t}_{−1} | 0.020 *** | 0.020 *** | 0.090 ** | −0.023 |

(3.06) | (3.06) | (2.53) | (−0.67) | |

Im_{t} | −0.004 | −0.000 | −0.021 ** | |

(−0.56) | (−0.00) | (−2.52) | ||

Soe | −2.297 *** | |||

(−5.58) | ||||

Cf_{t}_{−1} × Im_{t} | −0.001 * | 0.000 | ||

(−1.83) | (0.76) | |||

Cf_{t}_{−1} × Soe | 0.125 ** | |||

(2.38) | ||||

Im_{t} × Soe | 0.029 *** | |||

(5.38) | ||||

Cf_{t}_{−1} × Soe × Im_{t} | −0.001 * | |||

(−1.95) | ||||

Year | control | control | control | control |

Industry | control | control | control | control |

Observations | 5124 | 5124 | 5124 | 5124 |

Adjusted R-squared | 0.628 | 0.628 | 0.630 | 0.632 |

Total Sample | ||||
---|---|---|---|---|

Variables | Model 1 | Model 2 | Model 3 | Model 4 |

Constant | −0.051 | 1.004 *** | −0.334 | −0.470 |

(−0.91) | (2.69) | (−0.82) | (−0.66) | |

Rd_{i,t}_{−1} | 0.979 *** | 0.979 *** | 0.980 *** | 0.975 *** |

(52.89) | (52.89) | (53.41) | (52.73) | |

Rd^{2}_{i,t}_{−1} | −0.015 *** | −0.015 *** | −0.015 *** | −0.015 *** |

(−12.49) | (−12.49) | (−12.58) | (−12.37) | |

Sale_{t}_{−1} | 0.002 *** | 0.002 *** | 0.002 *** | 0.002 *** |

(6.00) | (6.00) | (5.43) | (5.69) | |

Cf_{t}_{−1} | 0.012 *** | 0.012 *** | 0.300 *** | 0.093 |

(6.30) | (6.30) | (8.18) | (1.02) | |

Im_{t} | −0.012 *** | 0.005 | 0.006 | |

(−2.66) | (0.93) | (0.69) | ||

Soe | 0.472 | |||

(0.57) | ||||

Cf_{t}_{−1} × Im_{t} | −0.004 *** | −0.001 | ||

(−7.87) | (−0.97) | |||

Cf_{t}_{−1} × Soe | 0.271 *** | |||

(2.68) | ||||

Im_{t} × Soe | −0.005 | |||

(−0.51) | ||||

Cf_{t}_{−1} × Soe × Im_{t} | −0.003 ** | |||

(−2.57) | ||||

Year | control | control | control | control |

Industry | control | control | control | control |

Observations | 3597 | 3597 | 3597 | 3597 |

Adjusted R-squared | 0.735 | 0.735 | 0.739 | 0.740 |

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## Share and Cite

**MDPI and ACS Style**

Zhao, X.; Wang, Z.; Deng, M. Interest Rate Marketization, Financing Constraints and R&D Investments: Evidence from China. *Sustainability* **2019**, *11*, 2311.
https://doi.org/10.3390/su11082311

**AMA Style**

Zhao X, Wang Z, Deng M. Interest Rate Marketization, Financing Constraints and R&D Investments: Evidence from China. *Sustainability*. 2019; 11(8):2311.
https://doi.org/10.3390/su11082311

**Chicago/Turabian Style**

Zhao, Xinxin, Zongjun Wang, and Min Deng. 2019. "Interest Rate Marketization, Financing Constraints and R&D Investments: Evidence from China" *Sustainability* 11, no. 8: 2311.
https://doi.org/10.3390/su11082311