Firm size, R&D, and performance: an empirical analysis on software industry in China

Chinese software industry has experienced a rapid growth during recent years. Many studies argue that the relative small average firm size and low input into R&D problems have negative impact upon sustainable development of Chinese software industry. These arguments are obviously based on two prerequisite, one is the existing of economies of scale in software industry, and the other is the positive impact of R&D upon firm performance. Based on two datasets, in which one is city level data published by National Bureau of Statistics of China and the other is firm level data collected in Hangzhou City of China, This work carries out empirical analysis on the economies of scale issue and impact of R&D on firm performance in software industry in China. The results reveal that firm size has consistent positive impact on productivity, but no significant influence on profitability. The positive influence of firm size on productivity is due to specialization degree and more inputs into the adoption of management tools in large firms. For the negative influence on profitability, the relative technical advantage still cannot sustain their product price premium under the intensifying competition from small firms, while R&D spending will increase development cost for large- and medium-sized software firms. As to the impact of R&D on firm performance, it is found that R&D intensity has significant negative on profitability, and on productivity to a certain extent. We also found that R&D professional ratio has positive impact upon firm profitability and productivity because of the nature of people-embodied knowledge transfer in software industry. Besides, we have not found evidence for significant positive influence of financial support in R&D from government, which mean that indirect policy instruments such as preferential taxation treatment are more efficient than direct R&D subsidiaries in Chinese software industry. Finally, the policy implications of these findings are discussed and concluded.