Risk tolerance towards research and development investment: the role of firm size and technology intensity

This research examines how risk tolerance towards research and development (R&D) investment varies by firm size and technology intensity using a case study of four groups of manufacturing firms (i.e. large high-tech firms, small high-tech firms, large low-tech firms, and small low-tech firms) in South Korea. Our research contributes to the literature by offering the first empirical application quantifying different risk tolerances towards R&D investment of firms of varying sizes and technology intensities using total factor productivity and optimal portfolio frontiers. We find that the risk tolerance towards R&D investment is proportional to firm size, and high-tech firms tend to be more risk tolerant than low-tech firms given the same firm size. Furthermore, we find that large low-tech firms have a greater tolerance for risk than small high-tech firms when the present guaranteed return is lower, but risk tolerance is reversed as the current guaranteed return increases. These findings could be used to inform R&D project funding decisions in particular, our finding of higher risk tolerance of small high-tech firms with higher present guaranteed return suggests that government subsidies for R&D investment may function as the present guaranteed return for small high-tech businesses.