THE NONLINEAR IMPACT OF RESEARCH AND DEVELOPMENT INVESTMENTS ON FIRM PERFORMANCE: A SIGMOID (S) CURVE APPROACH IN G20 COUNTRIES

Abstract

The interaction between research and development (R&D) investments and firm performance has been extensively studied in the academic literature. However, these studies have produced different findings by proposing various models to explain the relationship between R&D and firm performance. The inconsistency in findings can be partly attributed to limitations in the use of traditional linear modeling methods that do not fully capture the complex dynamics of this relationship. Using data on 31,205 firms and 434,016 observations in G20 countries over the period 2000-2022, this paper considers the Sigmoid (S) curve model, which aims to reconcile the differences in the literature and provide a more comprehensive view of the R&D performance relationship. The findings reveal a non-linear relationship between R&D intensity and firm performance and the validity of the S-curve model. Specifically, the R&D-performance relationship shows a negative slope at low levels of R&D investment, a positive slope at medium levels, and a negative slope again at high levels. These results suggest that the impact of R&D investments on firm performance varies depending on the level of investment. Moreover, the study reveals that this 3-stage S-curve relationship is consistent for firms with low firm size and low leverage, and that such firms are particularly affected by an increase in R&D investment. Finally, the findings show that this relationship holds both between developed and developing countries and between countries following Anglo-Saxon and Continental European law. However, this relationship is more pronounced in Anglo-Saxon and developing countries than in Continental European and developed countries.