Decision-Making Model of Firm R&D Expenditure Based on Managerial Discretion

Based on Gonzalez´s decision-making model of R&D expenditure, the paper introduces managerial discretion as a new variable to investigate the firm´s behavior mode in its decision-making process of R&D expenditure. The model can not only explain the decision-making result of expenditure level, but can explain the decision-making result of whether or not to initiate R&D activities. The model argues that due to the interest difference between managers and shareholders, firms with different managerial discretion level will have different R&D expenditure decisions. For firms with higher managerial discretion, both the probability of initiating R&D activities and the R&D expenditure level will be lower. The model results show that managerial discretion of the Chinese firms is relatively too high in case of R&D expenditure which discovers weaker internal balance mechanism for firms in China. Thus to control managerial discretion level reasonably will ensure the effective R&R activities and improve firmspsila technology innovation.