How do slack resources affect the relationship between R&D expenditures and firm performance?

Abstract

Research and development (R&D) investment affects future operating earnings. Behavioral theory claims that slack resources benefit innovation, whereas agency theory argues that they represent a form of inefficiency and inhibit innovation. This paper thus examines how slack resources affect the relationship between R&D investments and firm performance based on two dimensions of R&D: R&D capital and R&D expenses. R&D capital captures long‐term R&D investment, whereas R&D expenses represent R&D investment in the current year. This study is undertaken in Taiwan using a large 5‐year dataset within high‐tech industries. Slack resources are broadly classified into absorbed slack with low managerial discretion and unabsorbed slack with high managerial discretion. We find that absorbed slack negatively affects the relationship between R&D investments and performance, as proposed by agency theory. We further find that unabsorbed slack has a slightly curvilinear effect on the positive relationship between R&D capital and firm performance. The proposal of behavioral theory thus is more valid when focusing on unabsorbed slack resources. Our findings suggest that it is necessary to identify the types of slack and R&D investments that are being considered when discussing the impacts of R&D investment on performance.

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