A Quantile Regression Analysis on the Relationship Between R&D Investment and the Firm Growth

Abstract

Drawing on Gibrat’s law that firm growth rates are random and independent of firm size, this article reports theory and examines data through which ways that firms grow and why firms, regardless of their sizes, need to increase their research and development (R&D) investment. Using more than 10 years of longitudinal data on more than 1,000 small and medium-sized enterprises (SMEs) and large firms, this study analyzes the effect of the dynamic interaction between the past growth rate and R&D investment on the future growth rate of firms. Based on a quantile regression analysis, the findings show that high-growth SMEs experience an erratic growth pattern characterized by negative autocorrelation, whereas large firms often undergo a much smoother growth pattern. The findings contribute to advancing a nuanced theory of sustainable growth by theorizing how firms can grow continuously by increasing R&D investment and generating knowledge spill-over. Practitioners should be aware that firms are likely to show declining growth particularly after high growth in the past, while pursuing innovation through R&D investment can be a significant channel for the continued growth of firms.