The Relationship Between R&D Spending Instability and a Firm’s Performance



Year of publication 2017
Type Article in Proceedings
Conference Proceedings of the 5th International Conference on Management, Leadership and Governance
MU Faculty or unit

Faculty of Economics and Administration

Field Management and administrative
Keywords R&D investment fluctuations; firm performance; behavioral theory of the firm; German industrials
Description The link between investment in innovation and subsequent change in the competitive advantage or performance of a firm is one of the most frequently studied topics with a huge importance for strategic management. The relationship has been mostly confirmed under additional influencing factors, with the form of innovation investments arguably being one of them. The research following the behavioral theory of the firm assumes that a firm adjusts its R&D spending in accordance to performance feedback. This feedback stems from the comparison of the current firm performance with its historical aspiration, historical performance and performance of firms constituting its social benchmark. When this aspiration is not attained, a firm is motivated to change which results in a change in R&D spending. A firm that is subject to this performance feedback continuously adjust its investment level—not because of changes in the research potential or deployment of a new strategy, but because of performance fluctuations, which can be caused by countless reasons, some of them outside a firm’s control. In this research, it is argued that an increased fluctuation of a firm’s R&D expense is related to a reduced financial performance. This hypothesis is tested on a sample of large German industrial firms listed on stock exchange markets followed between the years 2001 and 2015. Using fixed and random effects panel data models, the R&D instability measured by three-year and five-year standard deviations is related to financial performance levels measured by return on assets, return on equity and profit margin. Results support the proposed relationship between R&D expense instability and the subsequent financial performance of a firm. Although a causal link cannot be clearly established, the results indicate that firms with a lower financial performance have higher R&D investment fluctuations.
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