THE EFFECT OF RESEARCH AND DEVELOPMENT INVESTMENT ON FIRMS’ FINANCIAL PERFORMANCE: EVIDENCE FROM MANUFACTURING FIRMS IN TURKEY

Öz

Following recent literature, we present a model of endogenous firm performance with research and development (R&D) investment as one of the main mechanisms of firm performance. The purpose of the study is to enhance the analysis of the variables influencing firms’ financial performance: thus we focus our investigation on the study of the effect of research and development investment on firm’s financial performance. Return on assets used as a measure of financial performance. Capital structure, liquidity, efficiency and firm size factors determining firm performance also are investigated. Manufacturing firms registered Istanbul Stock Market (BIST) were classified according to the sectoral approach. The sectoral approach is an aggregation of the manufacturing industries according to technological intensity and based on the Statistical Classification of Economic Activities in the European Community (NACE) at 3-digit level. The level of R&D intensity served as a criterion of classification of economic sectors into high-technology, medium high-technology, medium lowtechnology and low-technology industries. Our study evidences a positive effect of R&D intensity on the firm performance by using GMM system estimators for a sample of 145 manufacturing firms registered BIST for the 2008–2013 periods. This paper gives empirical support to those recommendations from policy makers and business leaders for maintaining the R&D expenditures especially in high-technology sectors even when facing a recession.

Anahtar Kelimeler

• Turkey

THE EFFECT OF RESEARCH AND DEVELOPMENT INVESTMENT ON FIRMS’ FINANCIAL PERFORMANCE: EVIDENCE FROM MANUFACTURING FIRMS IN TURKEY

Öz

Following recent literature, we present a model of endogenous firm performance with research and development (R&D) investment as one of the main mechanisms of firm performance. The purpose of the study is to enhance the analysis of the variables influencing firms’ financial performance: thus we focus our investigation on the study of the effect of research and development investment on firm’s financial performance. Return on assets used as a measure of financial performance. Capital structure, liquidity, efficiency and firm size factors determining firm performance also are investigated. Manufacturing firms registered Istanbul Stock Market (BIST) were classified according to the sectoral approach. The sectoral approach is an aggregation of the manufacturing industries according to technological intensity and based on the Statistical Classification of Economic Activities in the European Community (NACE) at 3-digit level. The level of R&D intensity served as a criterion of classification of economic sectors into high-technology, medium high-technology, medium lowtechnology and low-technology industries. Our study evidences a positive effect of R&D intensity on the firm performance by using GMM system estimators for a sample of 145 manufacturing firms registered BIST for the 2008–2013 periods. This paper gives empirical support to those recommendations from policy makers and business leaders for maintaining the R&D expenditures especially in high-technology sectors even when facing a recession

Anahtar Kelimeler

• R&D, innovation, firm performance, generalized method of moments, Turkey

Kaynakça

1. Adams, M. and Buckle, M., 2003. “The Determinants of Corporate Financial Performance in the Bermuda Insurance Market”, Applied Financial Economics 13, pp.133-143.
2. Albayrak, A. S. and Akbulut, R. 2008. “Karlılığı Etkileyen Faktörler: İMKB Sanayi ve Hizmet Sektörlerinde İşlem Gören İşletmeler Üzerine Bir İnceleme”, ZKÜ Sosyal Bilimler Dergisi, 4(7), pp.55-83.
3. Alpkan, L., Ceylan, A. and Aytekin, M., 2002. “Relationships among environmental factors, manufacturing strategies and performance”. In: Proceedings of the Second International Conference on Responsive Manufacturing, Gaziantep, Turkey, pp. 435–440 (in Turkish).
4. Arellano M., and Bond, S., 1991. “Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations”, The Review of Economic Studies 58(2), pp. 277-297.
5. Arellano, M., and Bover, O., 1995. “Another Look at the Instrumental Variable Estimation of Error-Components Models”, Journal of Econometrics 68, pp.29-51.
6. Artz, K.W. Norman, P.M. and Hatfield, D.E., 2003. “Firm performance: A longitudinal study of R&D, patents, and product innovation,” presented at the Acad. Manag. Meeting, Seattle, WA, 2003, TIM, B1-6.
7. Baltagi, B., 2005. Econometric Analysis of Panel Data, Third Edition, England: John Wiley & Sons LTD.
8. Bednyagin, D., and Gnansounou, E., 2012. “Estimating spillover benefits of large R&D projects: Application of real options modelling approach to the case of thermonuclear fusion R&D programme”, Energy Policy, 41, pp.269-279.

9. Bell, G.G. 2005. “Clusters, networks, and firm innovativeness”, Strategic Management Journal, 26, pp.287-295.
10. Blundell, R. W. and Bond, S.,1998. “Initial Conditions and Moment Restrictions in Dynamic Panel Data Models”. Journal of Econometrics 87, pp.115–143.
11. Bokpin, G.A., 2009. “Macroeconomic development and capital structure decisions of firms: Evidence from emerging market economies”, Studies in Economics and Finance, 26(2), pp. 129-142.
12. Booth, L., Aivazian, V. Demirgüç-Kunt, A. and Maksimovic, V., 2001. “Capital structures in developing countries”. The Journal of Finance 56, pp.87–130.
13. Bublitz, B. and Ettredge, M., 1989. The information in discretionary outlays: advertising, research, and development. The Accounting Review, 64 (1), pp.108–124.
14. Capon, N., Farley, J.U., Hoenig, S., 1990. “Determinants of financial performance: a meta-analysis”. Management Science 36 (10), pp.1143–1159.
15. Cardoso, A., Teixeira, A.C., 2009. Returns on R&D investment: a comprehensive survey on magnitude and evaluation methodologies. Institute for Systems and Computer Engineering of Porto, Innovation and Technology Transfer Unit, Working Paper.
16. Chakraborty, I., 2010. “Capital Structure in An Emerging Stock Market: The Case of India”, Research in International Business and Finance 24, pp.295–314.
17. Chakraborty, I., 2013. “Does Capital Structure Depend On Group Affiliation? An Analysis of Indian Firms”. Journal of Policy Modeling 35, pp.110–120.
18. Chandler, G.N., Hanks, S.H., 1994. “Market attractiveness, resource-based capabilities, venture strategies, and venture performance”. Journal of Business Venturing 9 (4), pp.331–349.
19. Chen, J.J., 2004. “Determinants of capital structure of Chinese-listed companies”, Journal of Business Research, Vol. 57, pp. 1341-51.
20. Chen, W. R. and Miller, K. D. (2007). “Situational and institutional determinants of firms' R&D search intensity”. Strategic Management Journal, 28(4), pp.369–381.
21. Ciftci, M. and Cready, W.M., 2011. “Scale effects of R&D as reflected in earnings and returns”, Journal of Accounting and Economics 52, pp.62–80.
22. Cohen W, Klepper S. A., 1996. “Reprise of size and R&D”. Economic Journal, 106, pp.925–51.
23. Cohen, W.M., Levinthal, D.A.,1990. “Absorptive capacity: a new perspective of learning and innovation”. Administrative Science Quarterly 35(1), pp.128–152.
24. Deesomsak, R ., Paudyal, K . and Pescetto, G., 2004. “The determinantso f capital structure: evidence from the Asia Pacific region”, Journal of Multinational Financial Management, 14(4/5), pp. 3 87-405.
25. Delmar, F., McKelvie, A. and Wennberg, K., 2013. “Untangling the relationships among growth, profitability and survival in new firms”. Technovation. In Press, Corrected Proof.
26. Ding, Y., Stolowy, H., Tenenhaus, M., 2007. “R&D productivity: an exploratory international study”. Review of Accounting and Finance 6 (1), pp.86–101.
27. Drobetz, W. Gounopoulos, D., Merikas, A. and Schröder, H., 2013. “Capital Structure Decisions of Globally- Listed Shipping Companies”, Transportation Research Part E: Logistics and Transportation Review 52, pp.49–76.
28. Durukan, M. B. 1997. “Hisse Senetleri İMKB'de İşlem Gören Firmaların Sermaye Yapısı Üzerine Bir Araştırma: 1990–1995”, İMKB Dergisi, 1(3), pp.75–91.
29. Ebaid, I. E. 2009. “The impact of capital-structure choice on firm performance: empirical evidence from Egypt”, The Journal of Risk Finance, 10(5), pp. 477-487.
30. Ehie, I.C., Olibe, K., 2010. “The effect of R&D investment on firm value: an examination of US manufacturing and service industries”. International Journal of Production Economics 128 (1), pp.127–135.
31. Eljelly and Abuzar M. A. 2004. “Liquidity-profitability Tradeoff: An Empirical Investigation in an Emerging Market (Liquidity Management)”, International Journal of Commerce and Management, June-2004.
32. Fama, E.F. and French, K.R., 2002. “Testing Trade-Off and Pecking Order Predictions about Dividends and Debt”, The Review of Financial Studies 15, pp.1–33.
33. Frank M.Z. and Goyal, V.K., 2003. “Testing the Pecking Order Theory of Capital Structure”. Journal of Financial Economics. 67(2), pp.217–248
34. Gleason, K. C., Mathur, L. K., and Mathur, I. 2000. “The Interrelationship between Culture, Capital Structure, and Performance: Evidence from European Retailers”, Journal of Business Research, 50(2), pp.185- 191.
35. Goddard, J, Tavakoli, M. and Wilson, J. 2005. “Determinants of Profitability in European Manufacturing and Services: Evidence from a Dynamic Panel Data”, Applied Financial Economics 15, pp.1269-1282.
36. Goto, A., Suzuki, K., 1989. “R&D capital, rate of return on R&D investment and spillover of R&D in Japanese manufacturing industries”. Review of Economics and Statistics 4, pp.555–564.
37. Grabowski, H.G., Mueller, D.C., 1978. “Industrial research and development, intangible capital stocks, and firm profit rates”. The Bell Journal of Economics 9 (2), pp.328–343.
38. Graves, S.B. and Langowitz, N.S. 1993. “Innovative productivity and returns to scale in the pharmaceutical industry,” Strateg. Manag. J., 14(8), pp. 593–605.
39. Griliches, Z., 1980. “R&D and the productivity slowdown”, American Economic Reviews, 70, pp.343-348.
40. Griliches, Z., 1986. “Productivity, R&D and basic research at the firm level in the 1970s”. American Economic Review 1, pp.143–154.
41. Hadlock, C. and James, C. 2002. “Do banks provide financial slack?”, Journal of Finance, 57, pp.1383- 420.
42. Hagedoon J, Cloodt M. 2003. “Measuring innovative performance: is there an advantage in using multiple indicators?” Research Policy, 32, pp.1365–79.
43. Hall, B.H. 1993. “The stock market valuation of R&D investment during the 1980s”, American Economic Review, 83, pp.259-264.
44. Hall, L.A., Bagchi-Sen, S., 2007. “An analysis of firm-level innovation strategies in the US biotechnology industry”. Technovation 27 (1–2), pp.4–14.
45. Hansen, L. P., 1982. “Large Sample Properties of Generalized Method of Moments Estimators”, Econometrica, 50(4), pp.1029-1054.
46. Hart, O., and Moore, J. 1995. “Debt and Seniority: An Analysis of the Role of Hard Claims in Constraining Management”, American Economic Review, 85, pp. 567-585.
47. Henderson, R, Cockburn, I. 1994. “Measuring competence: exploring firm effects in pharmaceutical research”. Strategic Management Journal 15, pp.63–84.
48. Hirschey, M., 1982. “Intangible capital aspects of advertising and R&D expenditures”. The Journal of Industrial Economics 15 (4), pp.375–390.
49. Hsiao, C., 2002. Analysis of Panel Data, Second Edition, United Kingdom: Cambridge University Press.
50. Huang, G. and Song, F. M. 2006, “The determinants of capital structure: Evidence from China”, China Economic Review, 17(1), pp. 14-36.
51. Hung, K.P. and Chou, C. 2013. “The impact of open innovation on firm performance: The moderating effects of internal R&D and environmental turbulence”, Technovation 33, pp.368–380
52. Jaffe, A.B. 1986. “Technological opportunity and spillovers of R&D”, American Economic Review, 76, pp.984- 1001.
53. Jensen, M. 1986. “Agency Costs of Free Cash Flow, Corporate Finance Takeovers”, American Economic Review, 76(2), pp. 323-339.
54. Jimenez, J.,D. and Sanz-Valle, R. 2011. “Innovation, organizational learning and performance”, Journal of Business Research, 64(4), pp.408-417.
55. Joeveer, K., 2013. “Firm, Country and Macroeconomic Determinants of Capital Structure: Evidence from Transition Economies”, Journal of Comparative Economics 41(1), pp.294–308.
56. Johannessen, J.A. 2008. “Organisational innovation as part of knowledge management”, International Journal of Information Management, 28(5), pp.403-412.
57. Katila, R. and Ahuja, G. 2002. “Something old, something new: A longitudinal study of search behavior and new product introduction. Academy of Management Journal, 45(6), pp.1183–1194.
58. Khazabi, M. 2008., “On R&D Investment”. ICFAI Journal of Managerial Economics, 6(2), pp.54-68.
59. Klette, T. J. 1996. “R&D, scope economies and plant performance”, RAND Journal of Economics,3, pp.502-522.
60. Lee, Y., Kim, S. and Lee, H. 2011. “The impact of service R&D on the performance of Korean information communication technology small and medium enterprises”, J. Eng. Technol. Manage. 28, pp.77–92
61. Lev, B., Sarath, B. and Sougiannis, T. 2005. “R&D Reporting Biases and Their Consequences”. Les distorsions de l'information relative à la R&D et leurs répercussions., 22(4), pp.977-1026.
62. Lin, BW, Lee Y, Huang SC. 2006. “R&D intensity and commercialization orientation effects on financial performance”. Journal of Business Research 59, pp.679–85.
63. Mone, M. A., McKinley, W., and Barker, V. L. 1998. “Organizational decline and innovation: A contingency framework”. Academy of Management Review, 23(1), pp.115-132.
64. Morbey G.K and Reithner, R.M. 1990. “How R&D affects sales growth, productivity and profitability”, Research-Technology Management, 33, pp.11–4.
65. Mumford, D.M. and Licuanan, B. 2004. “Leading for innovation: Conclusions, issues and directions”, The leadership quarterly, 15(1), pp.163-171.
66. Myers, S. C. 1984. “The Capital Structure Puzzle”, Journal of Finance 34, pp.575–92.
67. Myers, S.C. and N.S. Majluf, 1984. “Corporate Financing and Investments Decisions When Firms Have Information That Investors Do Not Have”, Journal of Financial Economics 13, pp.187–221.
68. O’Mahony, M. and Vecchi, M. 2009. “R&D, knowledge spillovers and company productivity performance”. Research Policy, 38, pp.35–44.
69. OECD, Organization for Economic Co-operation and Development, 2008. Factbook: Environmental and Social Statistics.
70. Rahaman, M. M., 2011. “Access to Financing and Firm Growth”. Journal of Banking & Finance 35, pp.709–723
71. Rajan, R. G. and Zingales, L. 1995. “What Do We Know About Capital Structure? Some Evidence from International Data”. Journal of Finance, 50(5), pp.1421-1460.
72. Renko, M. 2011. “Innovations and the performance of new ventures: Evidence from the Kauffman firm survey”. ICSB-George Washington University Business Creation Conference, Washington DC, October 6-8.
73. Roodman, D., 2006. How to do xtabond2: An introduction to difference and system GMM in Stata. W.P. 103, Center for global development, Washington, DC.
74. Şahin, O. 2011. “Kobi’lerde Finansal Performansı Belirleyen Faktörler, ZKÜ Sosyal Bilimler Dergisi, 7(14), pp.183-200.
75. Salim, R. A. and Bloch, H. 2009. “Business expenditures on R&D and trade performances in Australia: is there a link?” Applied Economics, 41(3), pp.351-361.
76. Seppa, R. 2008. “Capital structure decisions: research in Estonian non-financial companies”, Baltic Journal of Management, 3(1), pp. 55-70.
77. Serrasqueiro, Z., 2009. “Growth and profitability in Portuguese companies: a dynamic panel data approach”. Economic Interferences 9, pp.565-573.
78. Shah, A. and Khan, S. 2007. “Determinants of Capital Structure: Evidence from Pakistani Panel Data”, International Review of Business Research Papers, 3(4), pp. 265-282.
79. Sher, P. J., and Yang, P. Y. 2005. “The effects of innovative capabilities and R&D clustering on firm performance: the evidence of Taiwan's semiconductor industry”. Technovation, 25(1), pp.33-43.
80. Shu-Ching, C. and Wenching, F. 2006. “A Study on the Factors of Manufacturer Profitability: The Moderating Effect of Different Industries”. Journal of American Academy of Business, Cambridge, 8(2), pp.138- 144.
81. Titman, S. and Wessels, R. 1988. “The Determinants of Capital Structure Choice”, Journal of Finance 43, pp.1- 19.
82. Verma, D. and Sinha, K.K.2002. “Toward a theory of project interdependencies in high tech R&D environment”, Journal of Operations Management, 20, pp.451–68.
83. Vijayakumar, A. and Devi, S.S. 2011. “Growth and profitability in Indian Automobile Firms-An analysis. Journal for Bloomers of Research 3(2), pp.168-177.
84. Wakelin, K., 1998. “Innovation and export behaviour at the firm level”. Research Policy 7–8, pp.829–841.
85. Wang, C.H., Lu, Y.H., Huang, C.W. and Lee, J.Y. 2013. “R&D, productivity, and market value: An empirical study from high-technology firms”. Omega 41, pp.143–155.
86. Wu, X. and Yeung, C.K. 2012. “Firm Growth Type and Capital Structure Persistence”. Journal of Banking & Finance 36, pp.3427–3443.
87. Xin, J.Y., Yeung, C.L. and Cheng, T.C.E., 2010. First to market: is technological innovation in new product development profitable in health care industries? International Journal of Production Economics, 127 (1), pp.129–135.
88. Zhong, W., Yuan, W., Li, S. and Huang, Z. 2011. “The performance evaluation of regional R&D investments in China: an application of DEA based on the first official economic census data”, Omega, 39, pp.447– 455.