R&D expenditures and productivity under financial conditions: Static and dynamic panel data analysis for firms in Turkiye

Abstract

This study examines the impact of research and development (R&D) expenditures on firms' total factor productivity (TFP) by explicitly accounting for firms' financial conditions. The analysis is based on a comprehensive firm-level dataset for Türkiye covering the period from 2009 to 2023. Balance sheet and income statement data reported to the Revenue Administration are combined with the Annual Industry and Service Statistics provided by the Turkish Statistical Institute, resulting in a unique panel dataset at the firm and industry levels. The empirical framework employs highdimensional static and dynamic panel data models that control for firm, year, and industry fixed effects in order to address unobserved heterogeneity. Total factor productivity is estimated using both the Levinsohn-Petrin and Olley-Pakes methods augmented with the Ackerberg-Caves-Frazer correction, ensuring robustness to alternative productivity measurement techniques. In addition to three-dimensional static panel data models, dynamic specifications are also estimated using the System Generalized Method of Moments (GMM) approach to account for the persistence in productivity and potential endogeneity of R&D expenditures and other firm-level controls. The results consistently indicate that R&D expenditures have a positive and statistically significant effect on firms' total factor productivity across both static and dynamic specifications, even after controlling for firms' financial structure. The results of our investigation demonstrate that following the execution of a thorough series of sensitivity analyses with regard to alternative specifications of fixed effects and control variables for the static part, the findings suggest that once firm fixed effects are integrated into the estimation equation, the estimated coefficient on R&D expenditures maintains statistical significance only at the 10 percent level. According to the dynamic results, a positive and significant effect is observed in the relationship between R&D expenditure and TFP; however, due to the results of the Hansen test, these findings must be approached with caution. By relying on detailed firm-level micro data, this study contributes to the empirical literature on productivity dynamics in Türkiye. Strengthening R&D incentives and improving firms' financial resilience may advance the productivity enhancing impact of innovation oriented investments.