R&D and innovation and its impact on firm performance and market value : panel evidence from G7 economies

This study provides the first empirical evidence on the impact of innovation and firm growth on performance across G7 economies, using a unique panel dataset of 252 firms from 2020 to 2024. This study examines two core dimensions of firm performance-labor productivity and asset turnover-and employs multiple innovation proxies, including R&D Intensity, R&D-to-Assets, and R&D Growth Rate. To address potential endogeneity arising from reverse causality and omitted variable bias, the author implements the heteroskedasticity-based instrumental variable estimator, which constructs internal instruments from the model's error structure. The study's results reveal a consistent and significant positive causal effect of innovation on labor productivity, confirming its role as a driver of firm-level efficiency. However, innovation exhibits a negative and significant association with asset turnover, highlighting short-term trade-offs in operational efficiency, particularly in firms with aggressive R&D strategies. This study further finds that these effects are moderated by firm profitability and industry conditions, suggesting the importance of strategic and contextual alignment in innovation outcomes. Taken together, the findings offer new insights into the dual nature of innovation, enhancing productivity while imposing transitional efficiency costs and carrying significant implications for corporate innovation strategy and public policy in advanced economies.