Diminishing marginal returns from R&D investment: evidence from manufacturing firms

This study analyses the association between R&D Investment (RDI) and growth opportunities and show that there exists diminishing marginal returns in manufacturing firms. Extant literature has found that besides R&D investment, systematic risk, financial leverage and complementary asset inves...

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Bibliographic Details
Published in:Applied economics 2013-02, Vol.45 (5), p.611-622
Main Authors: Faff, Robert, Ho, Yew-Kee, Lin, Weiling, Yap, Chee-Meng
Format: Article
Language:English
Subjects:
Business investment
complementary assets
Economic growth
Economic models
Financial leverage
Financial risks
Interdependence
Investment returns
Investments
leverage
Manufacturers
Manufacturing
R&D
R&D investment
Rates of return
Research & development
Research and development
Structural analysis
structural equation model
Studies
systematic risk
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Summary:This study analyses the association between R&D Investment (RDI) and growth opportunities and show that there exists diminishing marginal returns in manufacturing firms. Extant literature has found that besides R&D investment, systematic risk, financial leverage and complementary asset investment are also associated with growth opportunities. Accordingly, we employ structural equation modelling to simultaneously estimate both a direct influence of RDI as well as indirect influences of RDI on growth opportunities via these three mediating effects. We find that the direct effect of incremental RDI on growth opportunities is independent of R&D intensity. Instead, the heterogeneous effects of RDI on systematic risk, financial leverage and complementary asset investment across firms with different R&D intensity level accounts for the diminishing marginal returns to R&D investment. We specifically observe that the greatest indirect effect is via the financial leverage of the firm. This study shows the importance of accounting for the interdependencies in R&D investment.
ISSN:0003-6846
1466-4283
DOI:10.1080/00036846.2011.608644