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We investigate the effects of R&amp;D investment on performance outcomes (sales growth and relative profitability) for Indian manufacturing firms. Previous research shows contradictory results—while some studies find a positive effect of R&amp;D on firm performance, some find that firms investing in R&amp;D do not perform significantly better, in some cases, even perform worse than their noninvesting counterparts. We claim that the effects of R&amp;D on performance are often misspecified. Indeed, innovation capabilities will probably simultaneously influence the decision to invest in R&amp;D and also R&amp;D’s expected benefits. We apply endogenous switching regression to tackle the issue of selection and censored data, and the results we observe are sharp: Firms investing in R&amp;D would have had less growth and less relative profitability if they had not done so. Interestingly, firms that did not invest in R&amp;D would not have benefited had they done so. We interpret this as evidence that firms need to have sufficiently developed management capabilities to be able to convert R&amp;D investments into tangible results, and that not all firms are well positioned to benefit from R&amp;D investment.

What’s good for the goose ain’t good for the gander: heterogeneous innovation capabilities and the performance effects of R&D