Impact of R&D Investment and Workforce Education on the Performance of Information Technology Firms
Investment in research and development (R&D) and an educated workforce are both important for information technology (IT) firms to innovate successfully and sustain their competitive advantage. Building on theories from human capital and innovation literatures, we posit that workforce education moderates the impact of R&D on firm profitability (return on assets: ROA). Further, the impact of R&D on ROA as moderated by workforce education manifest through the profit margin rather than the asset turnover component of ROA, consistent with the notion that the performance improvement is attributable to the reinforcement of the firm's differentiation position. Results from analyzing 713 firm-year observations over 2000-2006 from 216 firms in the information technology industries in Taiwan indicate that both R&D and education have a positive impact on a firm's ROA and the interaction effect between R&D and education is positive, suggesting that IT firms require highly educated employees to realize potential benefits from R&D investments. Additional analysis with stock returns also indicates that investors expect similar impact of R&D on future performance moderated by workforce education.