Determinants and Impact of Corporate Research & Development Investments on Firm Performance: Evidence from India

Abstract

Research & Development (R&D) investments have gained momentum in companies worldwide; it strengthens a firm’s competitiveness and enhances its long-run performance. However, they vary among companies due to the inherent risk in generating returns. This paper explores the factors that determine the level of R&D investments in a panel data of 368 Indian listed companies over eleven years from 2011 to 2021, and examines the immediate as well as lagged effect of R&D intensity on firm performance using a dynamic GMM estimator. The results found a positive impact of firm’s age on its R&D intensity but the firm’s size and its debt ratio are the negative determinants of R&D investments. The findings show a higher level of R&D investments as a potential source of insecurity among investors; evident by positive impact of R&D intensity on firm’s current financial performance (ROE) and negative impact on its market value (Tobin’s Q). Based on the evidence obtained in the context of developing countries, the study provides useful implications for facilitating R&D investments in emerging markets.