Enhancing the Financial Returns of R&D Investments through Operations Management

Abstract

Although much research has been carried out to examine various contextual issues and moderating factors for successful R&D investments, very little research has been conducted to explore the role of a firm's operational and process characteristics. In this study, we explore how firms could possibly enhance the financial returns of R&D investments through quality management, using Six Sigma implementation as an example, and efficiency improvement, using the stochastic frontier estimation of relative efficiency as a proxy. Based on data from 468 manufacturing firms in the United States over the period 2007–2014, we construct a dynamic panel data model to capture the effects of R&D investments on firms’ financial returns in terms of Tobin's q. Using the system generalized method of moments estimator, our results indicate that the financial returns of R&D investments are significantly enhanced when firms adopt Six Sigma and improve efficiency in operations. Our additional analyses further suggest that such an enhancement effect through quality and efficiency improvements is more pronounced under high operational complexity as approximated by labor intensity and geographical diversity. Instead of considering innovation activities and process management as contradictory functions, we show that quality and efficiency improvements indeed support firms’ R&D investments, leading to higher financial returns.