Firm-Specific Uncertainty and R&D Investment under Competition: Two-Step System Generalized Method of Moments

This study investigated the effect of firm-specific uncertainty on research & development investment; and the role of product market competition in this regard. The statistical research population includes 156 firms listed in Tehran Securities and Exchange from March 2015 to March 2022. It is used the multivariate regression models applying the dynamic panel data technique to test the hypotheses. Controlling for the endogeneity problem, it use the two-step system Generalized Method of Moments estimator to estimate the models. The findings showed that firm-specific uncertainty has a negative and significant effect on research & development investment; so, firms reduce research & development investment when firm-specific uncertainty increases, which is consistent with the real option theory. Therefore, considering the irreversible nature of R&D investment, firms reduce research & development investment under high uncertainty. On the other hand, product market competition has a positive and significant effect on research & development investment. In addition, product market competition significantly modulates the negative impact of firm-specific uncertainty on research & development investment, so leads to weakening the intensity of negative relationship between research & development investment and firm-specific uncertainty. These results are consistent with the theory of strategic growth options. According to this view, in a competitive environment under high uncertainty, firms face more pressure to survive in the market and invest heavily in research and development projects in order to gain a competitive advantage over competing firms; so, competition reduces the effect of uncertainty on research and development investment.