DOI: 10.52131/pjhss.2023.1103.

0639

Pakistan Journal of Humanities and Social Sciences

Volume 11, Number 03, 2023, Pages 3586–3591

Journal Homepage:
https://journals.internationalrasd.org/index.php/pjhss

Impact of Research and Development Expenditures on Firm Level

Innovation: Evidence from Developing Nations

Nadia Aftab1, Adeela Khalid2, Syed Mumtaz Ali Kazmi 3

, Syed Muhammad Imran4,
Muhammad Omair5
1
Ph.D. Scholar, National College of Business Administration and Economics, Bahawalpur, Pakistan.
Email: [email protected]
2
Ph.D. Scholar, National College of Business Administration and Economics, Bahawalpur, Pakistan.
Email: [email protected]
3
Associate Professor, National College of Business Administration and Economics, Bahawalpur, Pakistan.
Email: [email protected]
4
Assistant Professor, Government Associate College Yazman, Pakistan. Email: [email protected]
5
Ph.D. Scholar, National College of Business Administration and Economics, Bahawalpur, Pakistan.

ARTICLE INFO ABSTRACT

Article History: Developing countries are lagging behind in terms of research and
Received: July 14, 2023 development expenditure and innovation activities. The ability to
Revised: September 26, 2023 innovate depends upon the worker's knowledge, skills, training,
Accepted: September 27, 2023 and experience. It is widely believed that innovation drives growth
Available Online: September 28, 2023 and plays a vital role in firm survival. The study's objective was
Keywords: to investigate the effect of a firm's research and development
Research & Development expenditures on innovation activities in less developing nations
Expenditure using World Enterprise Survey data. The study utilized the
multilevel logistic regression model. The innovation is measured
Innovation
through the survey question, “During the last three years, has
Skilled Worker
this establishment introduced new or significantly improved
World Enterprise Survey products or services”. The results of the logistic regression model
Funding: indicate that research and development expenditures has a
This research received no specific positive impact on innovation. The all of other control variables
grant from any funding agency in the such as registered firm, firm size, firm age and skilled worker also
public, commercial, or not-for-profit positively affected by research and development expenditures.
sectors.
© 2023 The Authors, Published by iRASD. This is an Open Access article
distributed under the terms of the Creative Commons Attribution Non-
Commercial License
Corresponding Author’s Email: [email protected]

1. Introduction
The innovation is most important for the performance of firms. Researchers all over the
globe are much interested in investigating the procedure of innovation and the effects of
innovation on firm performance and development (Acs & Isberg, 1991; Aminullah, Hermawati,
Fizzanty, & Soesanto, 2017; Egbetokun, Atta-Ankomah, Jegede, & Lorenz, 2016; Imran et al.,
2020; Martínez‐Ros & Labeaga, 2009; McWilliams & Zilbermanfr, 1996; Santos-Vijande &
Álvarez-González, 2007). Innovation shows the procedure of modification, conversion of
knowledge, thoughts, and inventions into marketable feasible things, services or methods of
production. It has developed all over the history although its evaluation in the literature of
economics. Smith (1776) claimed that innovation originates from growth. Schumpeter and Opie
(1934) had given the clear evaluation of innovation and its explanation and economic function.
He said that essential technological changes leads to innovative damage and the creation of new
ones, which control growth, while stimulation of this type of innovation leads to further growth.
Innovation of firm determined by a constant development in the skill and knowledge
(Kleinschmidt, De Brentani, & Salomo, 2007). The adaptation and acceleration of innovation has
promoted the process of economic growth and social evolution (Pavitt, 1984). Lane and Godin
(2013) discussed that Technological initiative countries became economic, social and innovative
leaders. Development communicates the cycle of progress or the change of information,
thoughts, and creations into industrially practical products, administrations, or cycles. It has
advanced since the beginning through its examination in the financial matters writing verifiably
contended that development drives growth (Santos-Vijande & Álvarez-González, 2007). The

3586 eISSN: 2415-007X

Pakistan Journal of Humanities and Social Sciences, 11(3), 2023

more unequivocal examination of advancement, its definition, and the financial job were given
by (Schumpeter, 1939). Generally speaking, advancement is viewed as a driver of monetary
development, firm execution and trading exercises. In that capacity, it has become an appealing
field of examination. The interaction of development might be just about as old as mankind as
it addresses the dynamic and precise headway of items, measures and authoritative work
strategies for numerous sorts. In the particular setting of firm advancement, the writing on
development generally acknowledges crafted by Schumpeter (1934) as the spearheading
commitment in the field. Firms take part in advancement to build their efficiency, intensity, and
piece of the overall industry which eventually expands their benefits. The industry in which a
corporation works also exerts influence on its characteristics and behavior. Research and
development (R&D) investments may yield greater advantages for high-tech firms in comparison
to traditional sectors. Moreover, the efficacy of research and development (R&D) expenditure in
fostering innovation can be influenced by the competitive environment and market dynamics.

The effects of research and development (R&D) investments on innovation at the

business level in developing countries exhibit variability, but they continue to play a significant
role in advancing technology and fostering economic expansion. Keeping in view the important
of innovation for the productivity of the firm, the current study aims to measure the effect of
research and development expenditure on the innovation at firm level. Much of the work has
been carried out in the context of determinants of innovation and effects of innovation at the
macro level. But only few studies have found from the micro level point of view specifically
relative to Pakistan. So the current study will be a significant contribution in the literature.

2. Literature Review
Jiang, Hossain, Khan, Chen, and Badeeb (2023) analyzed the impact of research and
development expenditure on green innovation. The study revisited this relationship to find the
robust results across the developing countries and ends up with the conclusion that research
and development expenditure boost trade of the nations and augment the innovation activities.
Hobday (2005) examined the research and development expenditure to evaluate the
robustness, coherence, and possible constraints of the evidence presented on the innovation.
The allocation of resources towards research and development (R&D) is of significant importance
in promoting innovation and facilitating economic progress, particularly in developing countries.
The primary objective of the study is to analyze the correlation between research and
development (R&D) spending and innovation at the company level within emerging countries.
The study concluded that an augmentation in research and development expenditures resulted
in heightened levels of innovation and technical progress, hence leading to eventual economic
expansion. Numerous studies have indicated a robust and statistically significant correlation
between research and development (R&D) investments and the degree of innovation exhibited
by firms operating in developing countries (Bernier, Hafsi, & Deschamps, 2015; Kallerud et al.,
2013; Koschatzky, 2001; Stahl, 2012; Yin, Crowley, Doran, Du, & O'Connor, 2023).
Remarkably, some studies have indicated an inverse correlation between research and
development (R&D) spending and innovation within specific developing nation environments
(Caputo, Lamberti, Cammarano, & Michelino, 2016; Jung & Kwak, 2018; Viscusi & Moore, 1993).
In their study, Penner‐Hahn and Shaver (2005) conducted an analysis of data obtained from
South Korean enterprises. Their findings revealed that an excessive allocation of resources
towards research and development (R&D) activities might potentially result in declining returns
in terms of innovation outcomes. The authors suggested that it is important for organizations to
achieve a harmonious equilibrium between research and development (R&D) investments and
other strategic endeavors in order to optimize the generation of creative outputs.The varying
results on the influence of research and development (R&D) investments on innovation in
developing countries can be largely ascribed to methodological discrepancies seen across
different studies. Various factors, including as the selection of measuring methods, the
magnitude of the sample size, and the quality of the data, can exert a substantial influence on
the outcomes.

3. Data and Methodology

To calculate how much research and development expenditure affects innovation
activities in developing countries we have model the functional relationship as:

𝐼𝑛𝑛𝑜𝑣𝑎𝑡𝑖𝑜𝑛 = 𝑓(𝑅𝑒𝑠𝑒𝑎𝑟𝑐ℎ 𝑎𝑛𝑑 𝐷𝑒𝑣𝑒𝑙𝑜𝑝𝑚𝑒𝑛𝑡 𝐸𝑥𝑝𝑒𝑛𝑑𝑖𝑡𝑢𝑟𝑒, 𝑅𝑒𝑔𝑖𝑠𝑡𝑒𝑟𝑒𝑑 𝑓𝑖𝑟𝑚, 𝐴𝑔𝑒 𝑜𝑓 𝑡ℎ𝑒 𝑓𝑖𝑟𝑚, 𝑆𝑖𝑧𝑒 𝑜𝑓 𝑡ℎ𝑒 𝑓𝑖𝑟𝑚, 𝑆𝑘𝑖𝑙𝑙 𝑊𝑜𝑟𝑘𝑒𝑟𝑠)

3587
 This study is based on the data taken from World Enterprise Survey. For empirical
estimation, to measure the effect of research and development expenditure on innovation
activities in developing countries. We created a mathematical model for the functional
relationship shown in Equation 1 above.

𝐼𝑁𝑁𝑂𝑉 = α + Ω1 R&Di + Ω4 REGFIR i + FAGEi + Ω8 FSIZEi + Ω9 SWOR i

INNOV is Innovation, R&D is research and development expenditure, REGFIR is

registered firms, FAGE is age of the firms, FSIZE is size of the firm, SWOR is skilled workers.
The deterministic relationship can be seen in the mathematical model created by Equation 2.
However, in reality, the firm's innovation is not only dependent on the variables listed in
Equation 2. We have included the error term as a random variable in Equation 2 to capture the
effect of all omitted variables in order to obtain reliable findings. Equation 3 provides the
econometric model that was utilized to obtain the BLUE estimations.

𝐼𝑁𝑁𝑂𝑉 = α + Ω1 𝑅&𝐷i + Ω4 REGFIR i + FAGEi + Ω8 FSIZEi + Ω9 SWOR i + ei

The data of 110 developing nation has been utilized in this study. The latest wave of the
World Enterprise Survey of all the developing nation is used in this study.

4. Results and Discussion

The Summary Statistics to calculate the impact of research and development expenditure
on innovation are displayed in Table1. The average increase in research and development is
2.75. Innovation has a mean value of 2.81. A registered company's mean worth is 47.29. Age
is represented by a mean of 0.753. Size has an average value of 3.73. The skilled worker mean
value is 0.706. The chosen sample is subjected to the Jarque-Bera normality test to determine
whether the sample's variables are normal. This test reveals that the sample's variables are all
normally distributed.

Table 1: Summary Statistics

Variables R&D INNOV REGFIR AGE SIZE SWOR
Mean 2.753333 2.813333 47.29667 0.753333 3.736667 0.706667
Median 3.000000 3.000000 50.00000 1.000000 5.000000 1.000000
Maximum 5.000000 5.000000 68.00000 1.000000 5.000000 1.000000
Minimum 1.000000 1.000000 25.00000 0.000000 1.000000 0.000000
Std. Dev. 1.343567 1.348288 9.446310 0.431791 1.744745 0.456051
Skewness 0.439124 0.333961 -0.021130 -1.175367 -0.777379 -0.907846
Kurtosis 2.201162 2.106434 2.694318 2.381488 1.741304 1.824185
Normality Test
Jarque-Bera 17.61826 15.55725 1.190346 73.85635 50.01986 58.49102
Probability 0.000149 0.000419 0.551467 0.000000 0.000000 0.000000
Observations 300 300 300 300 300 300

The correlation analysis to calculate the impact of research and development expenditure
on innovation is displayed in Table 2. According to the correlation matrix's findings, research
and development expenditure and innovation are positively correlated. Increased research and
development will result in an 86.21% rise in innovation. A positive link exists between innovation
and the variables of registered businesses, age, size, and skilled labor.

Table 2: Correlation Analysis

R&D INNOV REGFIR AGE SIZE SWOR
R&D 1 0.8621 0.1121 0.5342 0.6185 0.5692
INNOV 0.8621 1 0.1382 0.5583 0.5562 0.5198
REGFIR 0.1121 0.1382 1 0.0621 0.2246 0.3189
AGE 0.5342 0.5583 0.0621 1 0.2553 0.9571
SIZE 0.6185 0.5562 0.2246 0.2553 1 0.2767
SWOR 0.5692 0.5198 0.3189 0.9571 0.2767 1

The empirical findings of the linear probability model of the variable used to calculate the
impact of research and development expenditure on innovation are displayed in Table 3. The
findings of the research and development variable reveal a positive probability, indicating that

3588
Pakistan Journal of Humanities and Social Sciences, 11(3), 2023

there is a chance that the innovation will expand as R&D increases (Boon & Eijken, 1998; Gupta
& Wilemon, 1996; Imran, Ur Rehman, & Khan, 2019). The findings of the registered firm
variable show a positive probability, indicating that there is a chance that the innovation will
expand as the number of registered firms rises (Chakraborty, 2016).

Table 3: The Result of Logistic Regression

Variable Probability Std. Error T-Statistic Prob.
R&D 0.682644 0.038763 17.61064 0.0000
REGFIR 0.002259 0.004039 0.559188 0.5765
AGE 0.320912 0.105523 3.041167 0.0026
SIZE 0.319815 0.076294 4.191865 0.0000
SWOR 0.617229 0.283707 2.175587 0.0304
C 0.274616 0.234022 1.173462 0.2416
R2 0.781743
F-statistic 210.6066
Prob(F-statistic) 0.000000
Observation 300

The findings of the age variable reveal a positive probability, indicating that there is a
chance that the innovation will expand as people get older. The findings of the size variable
show a positive probability, indicating that there is a chance that the innovation will expand as
size increases. The skilled worker variable's results reveal a positive probability, indicating that
there is a chance that the innovation will expand as skilled workers increase (Elnaga & Imran,
2013; Imran et al., 2020; Peluffo, 2014).

Table 4: Marginal Effects

Variables Coefficient Standard Errors Probability Value
R&D 0.4985 .3218858 0.121
REGFIR 0.3457 .1586641 0.029
AGE 1.6156 .263764 0.000
SIZE 0.1788 1.126534 0.053
SWOR 0.7123 9.1207 0.060

The coefficient of R&D is 0.4985137, meaning that if R&D increases, innovation will
increase by 49.85 percent while holding all other variables equal. The REGFIR coefficient is
0.3457, meaning that if registered firms rise while holding all other variables constant, the
innovation will increase by 34.57 percent. The AGE coefficient is 1.6156, meaning that older
businesses improve innovation by 1.6156 while holding all other variables constant. The SIZE
coefficient is 2.1788, meaning that increasing the firm's size will result in a 17.88% increase in
innovation while holding all other variables equal. The SWOR coefficient is 0.7123, meaning
that, assuming all other variables remain constant, an increase in the firm's skilled personnel
will result in an increase in innovation of 0.7123.

5. Conclusion and Policy Recommendation

This study has used enterprise survey data of developing countries conducted by the
World Bank. It is a survey of large, medium and small companies, which concentrates on topics
connected to business surroundings. The linear probability model is used to estimate the effect
of research and development expenditures on innovation. We have measured the innovation
with research and development expenditures. The summary statistics shows that the sample's
variables are all normally distributed. According to the correlation matrix's findings, research
and development expenditures and innovation are positively correlated. The empirical findings
of the linear probability model shows that the R&D variable reveal a positive probability,
indicating that there is a chance that the innovation will expand as human capital increases. It
is proposed that in order to improve the innovation, research and development expenditures
must be boosted. To encourage businesses to enhance their creative activities, the government
must offer incentives. According to the study's findings, registered businesses function better
than unregistered ones, as seen by their ability to increase innovation. It is proposed that the
number of registered firms be increased. The government needs to encourage businesses and
lower the barriers to business registration. According to the findings, older firms have a favorable
impact on a boosting innovation. Older businesses must receive the perks. The empirical analysis
demonstrates that larger firms have a favorable impact on innovation, regardless of the size of
the company. Larger companies must receive the incentives. According to the findings,

3589
competent individuals have demonstrated how innovation has a good impact on a company's
performance. The company needs to acquire qualified person to boost innovation. Based on
these findings, developing countries can boost their innovation activities if they increase
research and development expenditure at both the national and firm levels.

References
Acs, Z. J., & Isberg, S. C. (1991). Innovation, firm size and corporate finance: an initial inquiry.
Economics letters, 35(3), 323-326. doi:https://doi.org/10.1016/0165-1765(91)90152-B
Aminullah, E., Hermawati, W., Fizzanty, T., & Soesanto, Q. M. (2017). Managing human capital
for innovative activities in Indonesian herbal medicine firms. Asian Journal of Technology
Innovation, 25(2), 268-287. doi:https://doi.org/10.1080/19761597.2017.1385969
Bernier, L., Hafsi, T., & Deschamps, C. (2015). Environmental Determinants of Public Sector
Innovation: A study of innovation awards in Canada. Public Management Review, 17(6),
834-856. doi:https://doi.org/10.1080/14719037.2013.867066
Boon, M., & Eijken, B. (1998). Employee training and productivity in Dutch manufacturing firms:
Statistics Netherlands, Division Research and Development, Department of ….
Caputo, M., Lamberti, E., Cammarano, A., & Michelino, F. (2016). Exploring the impact of open
innovation on firm performances. Management Decision, 54(7), 1788-1812.
doi:https://doi.org/10.1108/MD-02-2015-0052
Chakraborty, P. (2016). Judicial quality and regional firm performance: The case of Indian
states. Journal of Comparative Economics, 44(4), 902-918.
doi:https://doi.org/10.1016/j.jce.2016.07.001
Egbetokun, A., Atta-Ankomah, R., Jegede, O., & Lorenz, E. (2016). Firm-level innovation in
Africa: overcoming limits and constraints. In (Vol. 6, pp. 161-174): Taylor & Francis.
Elnaga, A., & Imran, A. (2013). The effect of training on employee performance. European
journal of Business and Management, 5(4), 137-147.
Gupta, A. K., & Wilemon, D. (1996). Changing patterns in industrial R&D management. Journal
of Product Innovation Management: AN INTERNATIONAL PUBLICATION OF THE
PRODUCT DEVELOPMENT & MANAGEMENT ASSOCIATION, 13(6), 497-511.
doi:https://doi.org/10.1111/1540-5885.1360497
Hobday, M. (2005). Firm-level innovation models: perspectives on research in developed and
developing countries. Technology analysis & strategic management, 17(2), 121-146.
doi:https://doi.org/10.1080/09537320500088666
Imran, S. M., Saleem, H. M. N., Javed, T., Shabbir, M. F., Sharif, M. S., & Kazmi, S. M. A.
(2020). IMPACT OF MANGERS’EXPERIENCE ON FIRM’S INNOVATION: EMPIRICAL
EVIDENCE FROM MIDDLE EAST AND NORTH AFRICAN (MENA). PalArch's Journal of
Archaeology of Egypt/Egyptology, 17(12), 1822-1830.
doi:https://doi.org/10.48080/jae.v17i12.7965
Imran, S. M., Ur Rehman, H., & Khan, R. E. A. (2019). Determinants of corruption and its impact
on firm performance: Global evidence. Pakistan Journal of Commerce and Social Sciences
(PJCSS), 13(4), 1017-1028.
Jiang, Y., Hossain, M. R., Khan, Z., Chen, J., & Badeeb, R. A. (2023). Revisiting Research and
Development Expenditures and Trade Adjusted Emissions: Green Innovation and
Renewable Energy R&D Role for Developed Countries. Journal of the Knowledge
Economy, 1-36. doi:https://doi.org/10.1007/s13132-023-01220-0
Jung, S., & Kwak, G. (2018). Firm characteristics, uncertainty and research and development
(R&D) investment: The role of size and innovation capacity. Sustainability, 10(5), 1668.
doi:https://doi.org/10.3390/su10051668
Kallerud, E., Amanatidou, E., Upham, P., Nieminen, M., Klitkou, A., Olsen, D. S., . . . Scordato,
L. (2013). Dimensions of research and innovation policies to address grand and global
challenges.
Kleinschmidt, E. J., De Brentani, U., & Salomo, S. (2007). Performance of global new product
development programs: a resource‐based view. Journal of Product innovation
management, 24(5), 419-441. doi:https://doi.org/10.1111/j.1540-5885.2007.00261.x
Koschatzky, K. (2001). Networks in innovation research and innovation policy—an introduction.
In Innovation networks: concepts and challenges in the European perspective (pp. 3-
23): Springer.
Lane, J. P., & Godin, B. (2013). Pushes and Pulls: Hi (S) tory of the Demand Pull Model of
Innovation. Science, Technology, and Human Values, 38(5).
doi:https://doi.org/10.1177/0162243912473163

3590
Pakistan Journal of Humanities and Social Sciences, 11(3), 2023

Martínez‐Ros, E., & Labeaga, J. M. (2009). Product and process innovation: Persistence and
complementarities. European Management Review, 6(1), 64-75.
doi:https://doi.org/10.1057/emr.2009.4
McWilliams, B., & Zilbermanfr, D. (1996). Time of technology adoption and learning by using.
Economics of Innovation and New technology, 4(2), 139-154.
doi:https://doi.org/10.1080/10438599600000005
Pavitt, K. (1984). Sectoral patterns of technical change: towards a taxonomy and a theory.
Research policy, 13(6), 343-373. doi:https://doi.org/10.1016/0048-7333(84)90018-0
Peluffo, A. (2014). Exports and Skills: The impact of destination in a middle income country.
Serie Documentos de Trabajo/FCEA-IE; DT04/14.
Penner‐Hahn, J., & Shaver, J. M. (2005). Does international research and development increase
patent output? An analysis of Japanese pharmaceutical firms. Strategic Management
Journal, 26(2), 121-140. doi:https://doi.org/10.1002/smj.436
Santos-Vijande, M. L., & Álvarez-González, L. I. (2007). Innovativeness and organizational
innovation in total quality oriented firms: The moderating role of market turbulence.
Technovation, 27(9), 514-532. doi:https://doi.org/10.1016/j.technovation.2007.05.014
Schumpeter, J. A., & Opie, R. (1934). The theory of economic development: an inquiry into
profits, capital, credit, interest, and the business cycle: Harvard University Press.
Smith, A. (1776). An inquiry into the nature and causes of the wealth of nations: Volume One.
In: London: printed for W. Strahan; and T. Cadell, 1776.
Stahl, B. C. (2012). Responsible research and innovation in information systems. In (Vol. 21,
pp. 207-211): Taylor & Francis.
Viscusi, W. K., & Moore, M. J. (1993). Product liability, research and development, and
innovation. Journal of Political Economy, 101(1), 161-184.
Yin, Y., Crowley, F., Doran, J., Du, J., & O'Connor, M. (2023). Research and innovation and the
role of competition in family owned and managed firms. International Journal of
Entrepreneurial Behavior & Research, 29(1), 166-194.
doi:https://doi.org/10.1108/IJEBR-12-2021-1031

3591