R&D intensity, free cash flow, and technological innovation: evidence from high-tech manufacturing firms in China

Technological innovation, which can be classified into major and minor innovation, enables firms to gain competitive and sustainable advantage in the changing environment. R&D investment and financial resources are recognized as two critical factors for fostering technological innovation. Based on a panel dataset of 257 listed Chinese high-tech manufacturing firms over the period of 2008-2015, we explored the effect of R&D intensity on technological innovation and the moderating role of free cash flow using negative binormal regression models. Our results reveal that the relationship between R&D intensity and technological innovation (both major and minor innovation) follows an inverted U pattern in which technological innovation increases with R&D intensity at decreasing rates and falls gradually after R&D intensity exceeds a threshold. Our results also indicate that free cash flow plays a moderating role in the relationship between R&D intensity and major innovation but not in the relationship between R&D intensity and minor innovation. Our study draws attention to the improvement of R&D investment efficiency in high-tech manufacturing firms and sheds light on the importance of holding cash in major innovation-oriented firms.