Do R&D Investments Confer Growth Options to Emerging Market Firms?

Although the relationship between R&D investments and long-term value creation has been extensively studied in the context of developed markets, we know little about the nature of this relationship in the context of emerging markets. Particularly, given that emerging market firms have increased their R&D investments in recent years, it is important to understand whether R&D has led to the creation of future growth opportunities for them. Based on the assumption that the functioning of R&D might differ between developed and emerging markets, I formulated two competing sets of hypothesis. The first one draws upon real options theory that views R&D as a source of future growth opportunities and in turn predicts a positive relationship between R&D investments and the creation of valuable growth opportunities. The second one, on the contrary, builds on the dysfunctions of R&D in emerging markets and predicts a negative association. Also, I examine the differential effects of market uncertainty, suggested by the two competing views, on the link between R&D and long-term performance. I tested the hypotheses with a sample of 1153 firm-year observations of large emerging market firms from 6 emerging economies during the period 2012-2013. I discuss the implications of the findings for the international business and innovation management literatures.