The Mechanism of Internal Control to Innovation Risks Based on Risk Abatement Model

【Authors】

TIAN Dan, LV Wendong, LIU Kaili

【WorkUnit】

TIAN Dan(Dongbei University of Finance and Economics, 116025)LV Wendong(University of International Business and Economics, 100029)LIU Kaili(Army Logistics Academy, 401331)

【Abstract】

Both innovation and internal control are the key factors for business growth. Innovation is a process full of high risks and uncertainties, and internal control is a systematic and formal management mechanism. Innovation and internal control are interdependent as well as contradictory, and they are paradoxical in aspects of resource allocation, organizational structure, operational mechanism and cultural atmosphere. Visionary companies could introduce risk management without sacrificing their innovation and risktaking activities, and their good internal control has dual functions: risk aversion and value creation. We use a risk abatement model and analyze 1706 Chinese listed companies over 12 years to test the effect of internal control, R&D investment and their interaction to risks. This paper analyzes the mechanism of internal control dealing with risks and uncertainties of innovation. When performance exceeds aspirations, companies with good internal control could manage innovation risks effectively by making exploitative R&D investments that lead to more reliable and less risky sales levels. However, performance below aspirations leads to exploratory R&D investments, and internal control could not manage uncertainties of exploratory innovation and help to support the creation of value. 

JEL：G39, M00, O30

【KeyWords】

Risk Management, Internal Control, Innovation Risks, Risk Abatement, R&D Investment