The Relationship Between R&D Investment and Firm Profitability Under a Three-Stage Sigmoid Curve Model: Evidence From an Emerging Economy

• Published in: IEEE transactions on engineering management Vol. 57; no. 1; pp. 103 - 117
• Main Authors: Yang, Kuo-Pin, Chiao, Yu-Ching, Kuo, Chih-Chung
• Format: Journal Article
• Language: English
• Published: New York IEEE 01.02.2010; The Institute of Electrical and Electronics Engineers, Inc. (IEEE)
• Subjects: Biological system modeling; Correlation analysis; Economics; Emerging markets; Financing; Foundations; Governments; Industries; Investment; Investments; Low level; Manufacturing; Nonlinearity; Optimal level; Portfolios; Profitability; R&D; Research & development; Research & development expenditures; research and development (R&D); sigmoid (S) curve; Studies; Technological innovation; threshold; Taiwan
• ISSN: 0018-9391; 1558-0040
• DOI: 10.1109/TEM.2009.2023452

The relationship between investment in research and development (R&D) and firm performance has been the subject of numerous academic investigations, but the findings of these investigations have varied greatly, with research revealing a number of different patterns in the R&D-performance relationship. This inconsistency may be partly attributable to the failure of the commonly used linear modeling method to capture the full dynamics of the R&D-performance relationship. Based on the sigmoid (S) curve paradigm, as well as on other economic foundations, this study proposes the use of a three-stage S-curve model to help reconcile the disparities in the literature. This S-curve model shows that the relationship between R&D intensity and firm profitability is nonlinear, with the slope negative at low levels (stage 1), positive at medium levels (stage 2), and negative again at high levels of R&D investment (stage 3). Empirical evidence from a sample of 377 publicly listed Taiwanese high-tech manufacturing firms and 179 nonhigh-tech firms, examined during the period between 2000 and 2007, confirmed our proposed model. This study not only establishes a relationship pattern that differs from that shown in past studies, but also has important managerial implications for R&D managers and important policy implications for governments.