ANALYSIS MODEL

• Explained variables: The explained variables of this study are the enterprise technological innovation (R&D), referencing to Balkin and Markman (2000), which is measured by the ratio of R&D investment and main business income

• Explanatory variables: The explanatory variable is product market competition. According to industrial organization theory, how to define market is a problem, so there is no accepted appropriate index to accurately measure product market competition. It is believed that HHI seems to be a very effective index when internal market is the main market. So HHI is chosen to represent product market competition. On the basis of listed companies information got from Peking University academic financial database, HHI indexes of each industry are calculated. The lower the index is, the more intense the competition is 

• Control variables: The control variables of this study is consist of enterprise characteristic variables and enterprise governance variables

• Enterprise characteristic variables: 

Size: the natural logarithm of total assets of the companies works as substitution variable of enterprise scale. High investment is needed for technological innovation and high risk is always coming along. Large corporations occupy more resource and can meet the demand of high investment. On the other hand, companies with large scale can invest to different domains and technical risk can be scattered through persification of investment. Dai and Da (2007) proposed that the larger the enterprise is, the higher the R&D investment is.

Leverage: It is measured by the ratio of total liabilities and total asserts. When the liabilities of the enterprise are high, it faces higher risk of bankruptcy and creditors unwilling to bear the high risk to support the R&D. Nam et al. (2003) also found that the R&D is lower in company with high debts.

Growth: The opportunity to grow is a critical motivation of enterprise investment. The higher the growth of the company, the greater the motivation is to take advantage of technological innovation to create growth opportunities.

• Enterprise governance variables: 

CR5: it is measured by sum of Shareholding percentage of top 5 shareholders. Concentrated shareholdings can increase the supervisory-control capability of shareholders and reduce “free rider” behaviors by supervising the innovation behaviors of managers. For China’s private enterprises, the entrepreneurs are always the first shareholders and the more shareholdings he get, the more innovation activities will be implement to make the long run subjects come true. Lee and O’Neil (2003) thought that large shareholders are more intended to acquire high and long-term returns through increasing innovation investment. The results of empirical analysis propose that the concentration of ownership is positively related to technological innovation investment.

Outside: is presented by the ratio of the number of independent directors with the total number on board. Independent directors can supervise the management layer, effectively compensate for the absence of supervisor and prevent the short-sight behavior of management layer. They can also work for the longterm development of the enterprise and positively improve the technological innovation. Chung et al. (2003) find that the ratio of independent directors is positively connected to the investment of technological innovation. 

State: is a dummy variable, if the type of final controller is state-owned, 1 and 0 otherwise. It is 1 if the enterprise chairman and general manager are served by one person and 0 otherwise.

MHS: the proportion of executives’ shareholdings. Shareholding motivation will increase the sense of belonging and connect the benefits of executives with the enterprise, which is beneficial to technological innovation. Wu and Tu (2007) also suggested that the ratio of CEO shareholdings positively may influence the R&D of enterprise.