Research and Development Abroad Increase Firm Profitability

German firms carrying out research both in Germany and abroad realise considerably higher profits. They experience a return on sales ratio that is almost two per centage points higher than in firms without own research and development (R&D) activities, and still one per centage point higher than in firms with only domestic research. These are the findings of a current study conducted by the Centre for European Economic Research (ZEW) in Mannheim.

"Own research and, in particular, own R&D activities abroad remarkably impact a firm’s profitability. All the more considering that the average pre-tax return on sales is 5.6 per cent in the firms analysed in the study. Hence, one or two percentage points make quite a difference," Bettina Peters, ZEW researcher responsible for the study, says. She analysed the data of 1,364 German firms that were collected for the Mannheim Innovation Panel. The data contain information on the kind, the extent and the location of R&D activities as well as the firms’ turnover and profits. 

The ZEW study was aimed at investigating if firms benefit from R&D activities abroad and make profits out of these ventures or if the costs outweigh the benefits. Due to the internationalisation of R&D, firms can on the hand gain through a better access to new knowledge, markets and more efficient production technologies worldwide. On the other hand, when firms expand their R&D activities to foreign countries they have to bear extra costs, for instance, for organising, controlling and coordinating dispersed activities or due to the loss of synergy effects at their home base. 

Since it takes time to translate research efforts into new products and processes, the ZEW study relates R&D activities in 2005 to future profits earned in 2008.Profitability is measured using profit margins, more precisely the earnings before taxation as a share of total sales..

The ZEW analysis indicates the effects of R&D activities on profitability. It further highlights that the extent of the internationalisation of R&D impacts profits. Firms conducting R&D in two or three foreign countries have higher return on sales than firms with R&D activities in four or more countries. Still, the return on sales is considerably higher than in firms with domestic R&D only.

For further information please contact

Dr. Bettina Peters, Phone +49 (0)621/1235-174, E-mail b.peters@zew.de

Anja Schmiele, E-mail schmiele@zew.de