A research on the effects of R&D activities on the financial performance of firms

In a rapidly evolving and globalizing world, classical production factors such as labor and capital are increasingly being replaced by knowledge and innovation. This shift intensifies competition at both country and corporate levels, creating the necessity for countries and firms to utilize their resources, capabilities, and know-how more effectively. At this point, Research and Development (R&D) activities hold strategic importance for both countries and firms. At the country level, R&D activities are fundamental to enhancing technological advancement, economic growth, and competitiveness. These activities accelerate economic development by fostering the creation of new products and innovations, contributing to the transformation of industries. For firms, R&D serves as a driving force in developing or improving products, services, and processes, thereby aiding in market share expansion and better meeting customer demands. Additionally, the commercialization of knowledge and technologies obtained through R&D increases firms' revenues, ensuring sustainable growth. Consequently, R&D activities are viewed as a critical strategic tool for securing long-term success for both countries and firms. Recognizing the strategic importance of R&D activities, countries and firms promote R&D through various policies and practices. At the country level, R&D policies and roadmaps, incentive and funding mechanisms, public-university-private sector collaboration programs, and educational projects support advances in R&D. At the corporate level, R&D contributes to competitive advantage, from developing new products to enhancing operational efficiency. Particularly in dynamic market conditions, R&D supports firms in being innovative and responsive to customer needs. Simultaneously, R&D activities help strengthen firms' technological infrastructures and play an effective role in sustainability issues, thereby enabling firms to enhance their market positions and better address environmental and social responsibilities. In the literature, there are many studies that reveal the relationship between R&D activities and firms' performance, particularly financial performance. In technology-intensive sectors, increased R&D expenditure is generally found to positively impact profitability, thereby enhancing the firm's value and reflecting potential for sustainable future growth. This, in turn, contributes positively to economic growth on a country scale. However, in some studies, it is stated that time may be needed for the benefits of R&D to be seen (lagged-year effect), and it is also pointed out that factors such as the shareholding structure of the firm, corporate governance style, age, etc. will also have an impact on the financial performance of the firm, and it is stated that a direct relationship cannot be established between R&D activities and financial performance. The first section of this study, which examines the effects of R&D activities on firms' financial performance, covers general concepts related to R&D and innovation, providing an overview of R&D policies and current practices in the world and Turkey. The second section explains in detail the ratio techniques and methods used in determining firms' financial performance and includes a literature review on the subject. The third section describes the methodology and research model used in this study and presents empirical findings on the immediate and lagged effects of R&D activities on firms' financial performance. Finally, findings and results are presented and the study is concluded with recommendations. The main objective of this study is to evaluate the impact of R&D activities on firms' financial performance. In this context, when the studies in the literature are analyzed, it is seen that the studies mostly focus on a specific sector and/or geographical area, and there are no specific study targets firms that have established R&D units with the focus of conducting R&D activities in Turkey. In order to provide clearer insights into the impact of R&D and offer a different perspective to the literature, this study examines firms of varying sizes and sectors across Turkey that have dedicated units for R&D activities (R&D Centers, Design Centers, Technology Development Zone Offices). This comprehensive approach aims to contribute new insights to the existing literature by evaluating the impact of R&D on financial performance from a broader perspective. In order to obtain more reliable results, the analyses were conducted on successful R&D companies with a long-standing R&D culture. In this context, in the light of the criteria of the 'R&D Centers Performance Index Model' determined by the Ministry of Industry and Technology, the 'R&D 250' list, which is published annually by the magazine Turkish Time and lists the most successful companies, was taken as the basis for the definition of successful, and the data for 2021 was used. Among these companies, the companies among the 500 companies with the highest market capitalization in Borsa Istanbul were filtered. In order to show that it has had an R&D culture for many years, the companies that have been carrying out R&D activities continuously between 2012 and 2021 were selected among the filtered companies. As a result, 34 companies that meet these criteria were identified and the studies were carried out on publicly traded data. The dependent variable 'Financial Performance' is represented by variables such as return on assets, return on equity, return on sales and earnings per share, while the independent variable 'R&D Activities' is expressed as R&D intensity. The analyses first examined the effect of R&D intensity on financial performance in the current year and then evaluated the lagged effects up to two years. In the results obtained, while some models demonstrated positive relationships at 1%, 5%, or 10% significance levels, others did not show significant effects, and no negative relationships found. In conclusion, investments in R&D are a critical factor influencing firms' growth, contributing to desired economic stability and the foundation for future strategic decisions. Numerous studies in the literature indicate that R&D investments enhance firms' productivity, create growth opportunities in local and global markets, manage technical risks to provide competitive advantage, and offer leadership opportunities from a strategic vision perspective. The findings of this study, combined with existing literature, suggest that R&D activities positively impact firms' financial performance. Therefore, it is recommended that firms prioritize R&D investments as a strategic focus.