The impact of R&D expenditures on future growth and profitability: empirical evidence from Europe

Abstract

PURPOSE OF THE STUDY

The purpose of the study is to examine the impact of company's R&D expenditures on future performance. This research investigates the relationship between R&D investments and future growth (as represented by revenue growth) and profitability (as represented by EBIT margin and ROA). Furthermore, the empirical part of the study aims to shed light on the issue whether the outcomes from R&D activities vary between the nations. Three research hypotheses are formed and tested by using a multiple regression model.

DATA

The data sample consists of publicly listed companies from 17 European Union member countries reporting sufficient financial and R&D data. The data for empirical analyses is collected during the period of 2005-2011. In respect with R&D data, the figures are collected between the years 2005 and 2007, while other financial data is gathered between 2008-2011. The entire initial sample covered all the listed companies within the EU area but due to missing data on selected variables, the sample size contracted to cover 733 non-financial companies.

RESULTS

The results show that, on average, firm's R&D expenditures are positively associated with future growth, but are negatively related to future profitability. In addition, the empirical results do not find statistical support for the hypothesis that outcomes from R&D vary between countries on average.