A recent research of the World Economic Forum underlines that firms invest in research and development (R&D) to generate knowledge and innovations that improve their future profitability.
Many policy initiatives to encourage research and development investment and innovation operate with financial incentives to reduce the cost of innovation, such as direct subsidies or favourable tax treatment of research and development expenses.
Refering to the Standard and Poor’s ratings, firms in a strong financial position may have a better chance of both successfully innovating and exploiting the economic returns to their innovations than those in a weak financial position.
Firms in poor financial condition on the other hand may lack the necessary resources to fully benefit from the innovation process and thus be less likely to invest in research and development.
The financial resources available to the firm are crucial for generating new innovations. Firms that invest in R&D have a higher probability of developing a new product or adopting a new production process than firms that do not, and the chance of successful innovation varies with the firm’s financial strength.
Financial strength contributes to differences in success rates of new product and process innovations, productivity improvement, and the profit impact of the innovations.