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

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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.
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Keywords: C33; G14; O32; R&D investment; complementary assets; leverage; structural equation model; systematic risk

Document Type: Research Article

Affiliations: 1: UQ Business School, University of Queensland, Brisbane, Australia 2: NUS Business School, National University of Singapore, 1 Business LinkSingapore 119224, Singapore 3: NUS Business School, National University of Singapore, Singapore 4: Faculty of Engineering, Department of Industrial and System Engineering,National University of Singapore, Singapore

Publication date: 01 February 2013

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