R&D investment, firm performance and moderating role of system and safeguard: Evidence from emerging markets

Abstract

The relationship between R&D and firm performance is highly dependent on the external environment. Therefore, this paper examined the effects of country level investor protection (safeguards) and governance mechanisms (systems) on the relationship between R&D and firm performance. Using GMM estimation and elasticity testing of panel data for 423 firms from 12 emerging countries, we find that a country’s safeguards tend to moderate the relationship between R&D and firm performance more than the system of a country. The results indicate that safeguarding is relatively more important for the relationship between R&D and firm performance than other country level governance mechanisms, as the former can easily attract outside capital when it is strong. These results have significant implications for innovation policy. In particular, managers may wish to strengthen investor protection to promote high R&D investment in order to increase firm performance.