R&D intensity, firm performance and the identification of the threshold: fresh evidence from the panel threshold regression model

Abstract

This article tests whether there is an optimal level of research and development (R&D) intensity at which point a firm is able to maximize its performance. An advanced panel threshold regression model is employed to investigate the panel threshold effect of R&D intensity on firm performance among publicly traded Taiwan information technology and electronic firms. The results confirm that a single-threshold effect does exist and show an inverted-U correlation between R&D intensity and firm performance. This article demonstrates that it is possible to identify the definitive level beyond which a further increase in R&D expenditure does not yield proportional rewards. Some important policy implications emerge from the findings

Does Innovation Pay Off in Terms of Firm Performance? - Evidence from the European Automotive Industry –

“…Similar results are found in terms of R&D as indicator of sales growth, while it is claimed that the amount invested needs to surpass a certain benchmark to become effective (Morbey, 1988). More precisely, it is proposed that R&D intensity improves performance only up to a certain level of investment, while after a particular threshold, decreasing returns are expected (Yeh, Chu, Sher, & Chiu, 2010). Nevertheless, with respect to a study of the top spending European companies, higher levels of R&D investments are shown to lead to superior sales growth (Garciá-Manjoń & Romero-Merino, 2012).…”

“…The R&D intensity, also known as the R&D ratio, is a common measure in innovation studies (e.g. Yeh et al, 2010). Data for the R&D ratio was gathered from the annual EU R&D scoreboard (European Commission, 2017b) as previously done by Garciá-Manjoń and Romero-Merino (2012), in addition to ORBIS by calculating the figures manually.…”

“…Nevertheless, given that the R&D intensity is significant at the 5% level (p = .026) and not at 1% or less, could suggest that some of the motor companies actually overinvest and returns diminish when a certain level of investment is surpassed (Yeh et al, 2010).…”

An Investigation of Chinese Textile Firms’ R&D Performance

“…First, R&D is a costly activity that has a direct negative impact on a company's balance sheet, and an indefinite level of R&D investment does not necessarily yield proportional financial rewards (Yeh et al, 2010). There are several possible explanations for this result.…”

“…Most approaches have relied on measuring either a firm's improvement in productivity (Christoffersen, 2002) or financial performance (Andras & Srinivasan, 2003). The following determinants of Chinese textile firms' R&D effectiveness were examined: R&D intensity, external R&D, and internal R&D (Pike et al, 2005;Yeh et al, 2010). The following determinants of Chinese textile firms' R&D effectiveness were examined: R&D intensity, external R&D, and internal R&D (Pike et al, 2005;Yeh et al, 2010).…”