The Effects Of Business Strategy On The Association Between R&D Expenditure And Future Firm Performance

Abstract

Research and Development (R&D) expenditure is one of the most essential factors for firm’s sustainable growth. Business strategy describes long-term business planning of a company, and chosen business strategy will have a significant impact on the financial status and performance of a firm. This study examines whether the business strategy affects the association between R&D and firm performance, defined as earnings persistence, earnings growth, and firm value. Like Jermias (2008), product differentiation and cost leadership strategies are classified by the cluster analysis using three ratios: R&D intensity, asset turnover, and profit margin ratio. Our findings are as follows. (1) the effect of R&D expenditure on earnings persistence according to the business strategy appeared to be almost insignificant. (2) the effects of R&D expenditure on earnings growth up to three consecutive years are stronger in firms with product differentiation strategy than in firms with cost leadership strategy. These results indicate that R&D are more important and have greater impacts on future performance for product differentiation firms than for cost leadership firms. (3) R&D expenditure of product differentiation firms are more closely related to the firm value than R&D expenditure of cost leadership firms. The results of this study will be useful to practitioners when they are making R&D-related decisions based on their business planning. Also, this study provides useful empirical results to financial analysts and accounting academics when they are analyzing profitability and firm value.