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New research explores R&D intensity, financial performance, and implications for firm competitiveness

May 09, 2024
By: Jerry Coughter

In the 21st century, some high-tech firms in emerging fields are valued more for their perceived innovation potential than by traditional measures of a successful business. But how does innovation influence the value of existing publicly traded firms? New research by Panteleimon Kruglov and Charles Shaw explores the relationship between R&D intensity and financial performance among S&P 500 companies over 100 quarters from 1998 to 2023 and its implications for firm competitiveness and market positioning.

The research employs various econometric models to estimate the relationships between R&D intensity and key financial and operational variables. These variables include total assets, EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization), physical assets, size, recession indicators, tax rate, dividend yield, and the Graham Number (a measure of fundamental value of a stock).

Interesting findings of this study include that while larger total assets and greater physical assets are associated with higher R&D intensity, firm size has a negative relationship with R&D intensity. Also, while economic downturns have a negative impact on R&D activities, this effect can be moderated or reversed under certain conditions. The study also addresses the limitations of using patents as a universal metric for innovation and emphasizes the need for a nuanced approach in measuring innovation and interpreting its relationship with financial indicators. Overall, the paper supports the idea that innovation plays a significant role in a firm's financial performance and competitiveness.

Policymakers seeking to stimulate innovation may want to explore the paper’s findings more closely. Since total assets are correlated to R&D intensity, policies that facilitate easier access to financial resources for firms could stimulate innovation. ​This easier access could be achieved by expanding the availability of tax incentives for R&D investments, government grants, and subsidies specifically targeted at innovation activities. ​And because R&D is seen to lag during economic downturns, policies that provide additional support to firms during recessions, such as R&D-related tax breaks or increased government spending on research , may encourage continuous investment in R&D. ​Similarly, policies that support small and medium-sized enterprises (SMEs), such as easing capital access or providing innovation-specific funding, could be particularly effective in boosting overall industry innovation. ​Finally, creating an ecosystem that nurtures innovation and competitiveness requires policymakers to have a long-term perspective is important given the considerable time required for most innovation to reach the market.

Kruglov, Panteleimon and Shaw, Charles, Financial Performance and Innovation: Evidence From USA, 1998 - 2023 (March 9, 2024). Available at https://ssrn.com/abstract=4753538 or http://dx.doi.org/10.2139/ssrn.4753538

r&d, innovation