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

Robert Faff, Yew Kee Ho*, Weiling Lin, Chee Meng Yap

*Corresponding author for this work

Research output: Contribution to journalArticleResearchpeer-review

8 Citations (Scopus)

Abstract

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.

Original languageEnglish
Pages (from-to)611-622
Number of pages12
JournalApplied Economics
Volume45
Issue number5
DOIs
Publication statusPublished - Feb 2013
Externally publishedYes

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