Firm Performance and R&D Investment Linkages: Study of India's Top 500 Companies

Amrinder Singh and Tarun Kumar Soni ()
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Tarun Kumar Soni: Indian Institute of Management Sirmaur, India

Journal of Developing Areas, 2022, vol. 56, issue 3, 17-29

Abstract: The importance of investment in research & development (R&D) has gained significance in India, especially in the last two decades after the Science and Technology Policy of India emphasized devoting 2% of GDP to R&D. In the past, firms have invested in R&D intending to foster innovation and improve global competitiveness. Amid rising market competition rapid technological changes R&D Expenditure of India's top 500 companies has been increasing. With growing R&D expenditure, it is vital to understand the efficiency of R&D spending. The paper empirically investigates the linkages between firm performance and current and past R&D expenditure in the same context. It employs a panel fixed effect model to examine the relationship between firm performance and R&D investments for top 500 listed companies for a period of 18 years i.e., from 2002 till 2019. It considers return on assets and net profit after tax as a proxy of firm performance. Current and past R&D intensity and R&D expenditure are the main independent variables. Corporate governance variables and other firm characteristics variables like size, age, risk, and solvency are taken as control variables. The preliminary analysis of past trends indicates a flattening of the R&D intensity curve, especially in the last five years, i.e., from 2014 onwards. Further, the findings of the empirical analysis provide evidence of a significant positive R&D investment–performance relationship among the sample firms in the medium term. The results are consistent after controlling for sample firms' corporate governance variables, size, risk, and leverage. The findings lead to important implications regarding interlinkages between firm performance, R&D intensity, corporate governance, and other firm characteristics for top Indian listed companies. The results contradict the existing theories, which consider R&D as long-term investments, the benefits of which are reaped by organizations in a very long time. The results have important practical implications for firms and policymakers to further promote R&D investments among firms to improve performance.

Keywords: Research and Development Intensity; Corporate Governance; Developing Economy (search for similar items in EconPapers)
JEL-codes: G3 O3 R5 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:jda:journl:vol.56:year:2022:issue3:pp:17-29

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