2017/21 | LEM Working Paper Series | ||||||||||||||||
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What’s good for the goose ain’t good for the gander: cock-eyed counterfactuals and the performance effects of R&D |
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Alex Coad, Nanditha Mathew and Emanuele Pugliese |
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Keywords | |||||||||||||||||
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R&D investment, Firm performance, Endogenous switching
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JEL Classifications | |||||||||||||||||
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D22, O32, L25, L6
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Abstract | |||||||||||||||||
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We investigate the effects of R&D investment on performance outcomes
(sales growth and relative profitability) for Indian manufacturing
firms. Previous research shows contradictory results - while some
studies find a positive effect of R&D on firm performance, some find
that firms investing in R&D do not perform significantly better, in
some cases, even perform worse than their non-investing
counterparts. We claim that the effects of R&D on performance are
often mis-specified: The contradictory results are likely due to 1)
inverse causality, i.e., firms invest in R&D as a function of sales
growth and/or 2) a bias caused by censored data (i.e. R&D investment
has a lower bound at zero). We apply endogenous switching regression
to tackle the issue of selection and censored data, and the results we
observe are sharp: firms investing in R&D would have had less growth
and less relative profitability if they had not done so.
Interestingly, firms that did not invest in R&D would not have
benefited had they done so.
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