Growth of the Firms and Investments in Innovations: An Empirical Investigation of the Indian Manufacturing Industry
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Growth of the Firms and Investments in Innovations: An Empirical Investigation of the Indian Manufacturing Industry Sukhdeep Singh1 · Indrani Chakraborty1
© The Indian Econometric Society 2020
Abstract The paper investigates the effect of the growth in R&D on firms’ growth (measured by growth in sales) in the Indian manufacturing industry during 1995–2017. As R&D strategy and outcomes of the firms may be different in developing countries than the developed ones, a study of developing economy should be an important addition to the literature which has earlier focussed mainly on developed countries. Panel ARDL model has been used to empirically test the relationship between growth and R&D investments. It helps to observe the short-run as well as the long-run association between growth in R&D and sales. For testing the robustness of our findings, we have also applied the Panel VAR method. Panel VAR provides the empirical evidence without assuming a priori direction of causality between the growth of R&D and sales. The overall results from both the econometric techniques point out that the growth of investment in innovations has a positive yet weak/limited effect on the growth of firms in the Indian manufacturing industry. However, a separate analysis of the manufacturing sub-sectors indicates that the association between the two variables is relatively stronger in case of the sub-sectors which have experienced rising R&D intensity than those where it has remained stagnant. Another important finding is that there exists two-way causality among R&D growth and sales growth in the overall manufacturing industry, as well as in the sub-sectors with rising R&D intensity. Nevertheless, among the sub-sectors with stagnant R&D intensity, R&D growth does not Granger-cause sales growth, whereas sales growth leads to the growth of R&D investments. Keywords Firm growth · Innovation · R&D · Manufacturing industry · India
* Sukhdeep Singh [email protected] Indrani Chakraborty [email protected] 1
Institute of Development Studies Kolkata (IDSK), 27/D, DD Block, Sector 1, Salt Lake, Kolkata, West Bengal 700064, India
13
Vol.:(0123456789)
Journal of Quantitative Economics
Introduction ‘Growth of the firms’ has remained a very important topic of discussion in the field of economics as well as management. The literature suggests that several firm-level factors like innovations (product and process), profit, productivity, ownership structure, trade-related practices, management capabilities and human capital determine the growth rate of the firms (see Coad and Holzl 2010). Similarly, Industry-level factors such as competition, spillovers and other macro-economic variables like industrial policies of the governments, structural properties of the economy, dynamics of demand and supply, and growth of financial sector may also impact the growth of firms. Various studies have explored the linkage between these factors and the firms’ growth. However, for the purpose of this study, we are limiting our focus on one wide
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