Impact of R&D on Firm Performance: Do Ownership Structure and Product Market Competition Matter?

Does spending more on R&D always improve corporate performance?

Muhammad Arif Khan, Meng Bin, Chunlin Wang, Hazrat Bilal, Arshad Ali Khan, Irfan Ullah, Amjad Iqbal, and Mohib Ur Rahman study this question in "Impact of R&D on Firm Performance: Do Ownership Structure and Product Market Competition Matter?".

Using 38,444 firm-year observations from Chinese listed companies between 2000 and 2020, they study the relationship between R&D expenditure and firm performance numerous statistical tests and show:

• R&D spending is negatively associated with firm performance: a one standard deviation increase in R&D intensity corresponds to a decrease of roughly 36% of a standard deviation in return on equity.
• State-owned enterprises experience a weaker negative effect of R&D on performance than privately owned firms, partly because government funding and subsidised bank loans cushion the financial burden of innovation.
• Product market competition significantly reduces the adverse impact of R&D spending on performance for state-owned enterprises.
• Non-state-owned firms in highly competitive industries do not benefit from the same moderating effect, whic suggests they bear a disproportionate share of the financial risk associated with R&D.
• Firm growth, executive stock option holdings, and patent protection each independently alleviate the negative impact of R&D on performance, while financial constraints intensify it.

This article suggests blanket R&D incentives may be less effective than targeted support mechanisms addressing the specific resource constraints faced by private firms competing against state-backed incumbents.

State ownership buffers R&D costs, which aligns with observations in OECD research on innovation policy, but also challenges the assumption private ownership always leads to more efficient innovation outcomes.

The study is confined to Chinese listed firms over a period of rapid market transition: the main drivers like preferential lending to state-owned enterprises may not generalise to economies with more developed capital markets or different ownership norms.