Can R&D investment reduce the impact of COVID‐19 on firm performance?—Evidence from India

• Published date: 01 December 2022
• Author: Shreya Biswas
• Date: 01 December 2022
• DOI: http://doi.org/10.1002/pa.2773

RESEARCH ARTICLE

Can R&D investment reduce the impact of COVID-19 on firm

performance?—Evidence from India

Shreya Biswas

Department of Economics and Finance, Birla

Institute of Technology and Science, Pilani,

Hyderabad Campus, Hyderabad, Telangana,

India

Correspondence

Shreya Biswas, Department of Economics and

Finance, Birla Institute of Technology and

Science, Pilani, Hyderabad Campus,

Hyderabad, Telangana, India.

Email: shreya@hyderabad.bits-pilani.ac.in

This study examines whether investing in R&D reduces the impact of exogenous

shocks like the COVID-19 on stock market performance and accounting performance

of manufacturing firms in India. For the sample of listed manufacturing firms, the

paper finds that the firms engaged in R&D activities had lower negative cumulative

abnormal return than those firms that did not invest in R&D in the pre-pandemic

period using multiple event windows. The result suggests that R&D investments can

lower value erosion for the shareholders during a severe crisis period. Further, using

a difference-in-difference fixed effects model, the study finds that manufacturing

firms engaged in R&D activities in the pre-pandemic period exhibited higher return

on sales and growth of total income during the pandemic quarter vis-à-vis the non-

R&D firms. The favorable accounting performance indicates the possibility of firm-

level R&D being associated with the firm's ability to adjust its functioning during a

crisis, thereby reducing the effect of the crisis. Finally, the study documents that gov-

ernment intervention to reduce the spread of the virus had a differential impact on

firms based on their industry of operation. The findings have implications for inves-

tors, corporate managers, and policymakers in India.

KEYWORDS

crisis, firm performance, India, pandemic, R&D, returns

1|INTRODUCTION

Innovation is an essential factor contributing to the productivity of

firms. There is a vast literature in the context of developed countries

documenting a positive effect of innovation on firm outcomes. Dabla-

Norris et al. (2012), using cross-country innovation survey data, found

that innovation is related to improvements in firm productivity and

the effect is stronger for the set of developing economies. This larger

effect for the latter set of countries is attributed to the fact that

developing economies adapt the existing technologies prevailing in

the developed markets to generate large productivity gains. In con-

trast, the developed countries closer to the technological frontier

experience lower marginal effects of innovation. R&D is one of the

most critical inputs for innovation. The early empirical work of

Griliches (1958) indicates that increasing R&D improves the yield of

crops. In addition to productivity, studies have also linked R&D

expenses with superior firm performance in Asian economies of India,

Korea, and others (Kim et al., 2014; Sharma, 2012). On the other

hand, another stream of research highlights the non-linear relationship

between R&D and firm performance. Chang and Su (2010) and Yeh

et al. (2010) find that there is an optimal level of R&D for Taiwanese

firms that maximizes firm profitability, beyond which there is a nega-

tive relation between R&D and performance.

Few studies have also examined the role of R&D during economic

downturns. Voigt and Moncada-Paternò-Castello (2009) find that sev-

eral European companies were planning to increase R&D activities

during the global financial crisis (GFC) of 2008 to increase their sur-

vival probability and improve their comparative edge in the market

post-GFC. In the Korean context, Jung et al. (2018) find that investing

in R&D improves the survival probability of innovative firms. Similarly,

family firms having access to internal funds increased their R&D

investments during the GFC to increase the likelihood of higher future

Received: 6 January 2021 Revised: 29 September 2021 Accepted: 8 October 2021

DOI: 10.1002/pa.2773

J Public Affairs. 2022;22(Suppl. 1):e2773. wileyonlinelibrary.com/journal/pa © 2021 John Wiley & Sons Ltd. 1of13

https://doi.org/10.1002/pa.2773