R&D Expenditures And Firm Performance: An Analysis Of PSX-Listed Firms
ABSTRACT
Purpose: This research investigates the impact of Research and Development (R&D) and Intangible Assets expenditure on the performance of firms listed on the Pakistan Stock Exchange (PSX) from 2010 to 2022, using Return on Assets (ROA) as a primary measure of performance.
Design/Methodology/Approach: The study employs panel data analysis, utilizing both Fixed Effects and Random Effects models to test the relationship between R&D and Intangible Assets expenditure and firm performance. Data were collected from firm annual reports (2010-2022), focusing on both R&D investment and intangible assets.
Findings: The empirical analysis confirms a positive and significant relationship between R&D spending and firm performance. The study also confirms that all results are robust and free from outliers and multicollinearity issues, with firms investing more in R&D showing higher returns on assets and competitiveness. Notably, the fertilizer, food, chemical, and manufacturing sectors (this industry is the main driving force of economic growth) exhibit the highest levels of R&D as well as Intangible Asset investment, indicating sector-specific strategies for innovation and growth.
Research Limitations/Implications: This study is limited by incomplete data on R&D and intangible assets in the firm’s financial statements, which constrains the accuracy and scope of the analysis. The research focuses on PSX-listed firms within a specific period, limiting its generalizability. Future research could expand to other markets and incorporate additional performance metrics like Market Performance (Tobin’s Q), Including qualitative methods, such as interviews or case studies, can provide deeper insights into the contextual factors influencing the relationship between R&D expenditures and firm performance. Additionally, considering macroeconomic variables like economic policy changes and industry-specific regulations.
Practical Implications: The outcomes of this study enable the firms, particularly in highimpact sectors like fertilizer, food, chemical, and manufacturing, sectors, should prioritize R&D to foster growth and innovation. Policymakers are advised to implement supportive measures such as tax incentives, grants, and subsidies for R&D activities, as well as policies that enhance intellectual property protection and streamline regulatory processes. Additionally, establishing partnerships between industry and research institutions, and investing in infrastructure and skilled workforce development, can create a more conducive environment for R&D investment and innovation.
Originality/Value: This research contributes to the existing literature by providing empirical evidence from an emerging economy, specifically Pakistan. It underscores the critical role of R&D and intangible assets in driving firm performance, aligning with theory, such as the resource-based view theory (RBV), and providing actionable insights for businesses and policymakers to foster innovation and economic development.
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