R&D Investment and Firm Growth: The Role of Tangible Asset Complementarity

Prior accounting and finance literatures document a positive relation between R&D investment and future operating performance, implicitly assuming that the benefits from R&D are independent of other resources. However, the economics and strategy literature provides a framework that other resources, such as tangible assets, complement R&D assets in achieving future growth. We combine the above two strands of literature and examine the complementary effect of tangible and R&D assets on future growth in operating performance. Consistent with the asset complementarity thesis, we find that the positive relation between R&D investment and future firm growth is stronger for firms with more tangible assets, and this relationship is not attributable to risk. These findings are robust to different measures of future growth in operating performance: earnings and cash flows. We also find that analysts and investors incorporate the complementary effect in forecasting future growth in operating performance and stock price. Collectively, the empirical evidence shows that tangible and R&D assets in concert are positively associated with future growth.