Impact of knowledge capital on a firm’s performance

Abstract

An oft repeated statement goes as: The only constant in this ever-evolving environment is change. To cope with this change, organizations have to be adaptive and proactive in approach. This captures the importance of innovation and the emphasis placed on Research and Development (R&D) by organizations these days. However, how this expenditure on R&D translates into firm performance is ambiguous, to say the least. A generally accepted wisdom is that the impact is favorable in the long run. However, in the immediate horizon, increased R&D spending puts negative pressure on the profitability as margins are squeezed. A lot of studies demonstrating the long run influence of persistent R&D on firm performance have been done in the American and European context. However, this has not been examined for India so far. The difference in R&D requirements for different industries manifests itself in different ways. High technology companies, pharmaceutical companies, biotech firms are big spenders on R&D. These firms face extremely high failure risks because a large proportion of their research yields no profitable opportunities. Hence, these firms which thrive on innovation enjoy extremely high gross margins (to compensate for large number of failures). Huge R&D expenditure by these firms is essential for their survival. Apart from these, there exist a lot of industrial firms. This study aims to look at the impact of persistent high R&D on one such industry, the automotive sector.