The impact of research and development expenditure on firm performance and firm value: evidence from a South Asian emerging economy

Abstract

PurposeThe main purpose of the study is to analyze the impact of research and development (R&D) expenditure on firm performance and firm value in an emerging economy.Design/methodology/approachIn this study, firm performance is examined by firm financial performance (return on asset (ROA) and return on equity (ROE)) and market performance (Tobin's Q (TBQ)). This study conducted a multivariate analysis on the sampled data using pooled ordinary least square (OLS) regression method. In addition, both the level and lagged models have been used to test hypothesis in order to get the results.FindingsAll the empirical results from different models found significant and positive association of R&D expenditure with firm performance and firm value. The study also validates that all results are robust and free from outliers and multicollinearity issues.Research limitations/implicationsMost of the studies regarding the R&D expenditure and its impact were conducted on developed countries addressing only firm performance. Whereby, this study examined the impact of R&D expenditure on both firm's financial performance and market performance as well as firm value in the context of an emerging economy.Practical implicationsThe outcomes of the study will enable the entrepreneurs, managers, investors and policymakers with more confidence to invest in R&D expenditure that will also ensure the organizational sustainability in the long run.Originality/valueMost of the prior studies regarding the R&D expenditure and its impact were conducted on developed countries addressing only firm performance. Herein, both firm's financial performance and market performance along with firm value have been analyzed in the context of an emerging economy. This paper is unique empirical research study due to different institutional and regulatory setting as well as corporate characteristics. This study strongly advocates the organizational learning theory, agency theory and resource-based view theory of firms' allocation of funds for future growth and innovation.