Effects of R&D and patents on the financial performance of Korean venture firms

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Abstract
This study examines the causal effect of research and development (R&D) and patents on the financial performance of venture firms in Korea, a model catch‐up economy. The tests for random and fixed effects yielded important findings. R&D investment is the most significant factor affecting patenting. However, the results for the effect of R&D and patents on financial performance were inconclusive. Whereas R&D was positively correlated with sales growth, R&D and patents did not improve firm profitability. These findings illustrate the difference between advanced economies and catch‐up economies in terms of incentives for R&D and patents. Unlike in advanced economies, venture firms in catch‐up economies have to depend on incentive‐based government support. Venture firms in catch‐up economies respond to this incentive system by simply increasing the number of patents and by being less diligent in terms of achieving financial performance.

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