R&D Elasticity and Firm Performance: An Empirical Analysis

Open Access
Author:
Bartell, Nathan Roderick
Area of Honors:
Economics
Degree:
Bachelor of Science
Document Type:
Thesis
Thesis Supervisors:
  • James R. Tybout, Thesis Supervisor
  • David Shapiro, Honors Advisor
Keywords:
  • R&D
  • elasticity
  • firm performance
  • production function
Abstract:
This paper empirically examines the relationship between the output elasticity of research and development (R&D) and firm financial performance. The purpose of this study is to examine if firms have an incentive to use R&D output elasticity as a metric to help determine R&D investment levels. This study looks at publicly traded United States firms from industries with recognized R&D expenditures. The relationship is examined by first measuring output elasticity of R&D at the firm level by using a random coefficient regression. Second, these firm level elasticities are used in a Quantile regression to determine the relationship between R&D elasticity and firm performance. The results of this study find that higher levels of R&D elasticity are related to higher growth rates of firm revenue, operating income, and operating margin. This study concludes that the R&D elasticity metric positively influences firm performance, and that firms do have an incentive to utilize the measure in their R&D investment decisions.