The R&D performance in Taiwan's electronics industry: a longitudinal examination

R&D investment has been widely regarded as an important input for firms, particularly for high‐tech firms, to achieve competitive advantage within their industry. Hence, a number of high‐tech firms are now investing substantial amounts into R&D. Since R&D efforts enable firms to raise the competitive advantage, one noticeable and interesting issue expected to know is the degree to which R&D investment influences firm output performance. In Taiwan, much greater emphasis is also being placed into R&D investment in the high‐tech industries; however, R&D output performance has never been seriously examined within this sector. Since the island's electronics industry is widely regarded as the most promising industry in the ‘high‐tech sector’, and is expected to place greatest emphasis on its R&D efforts, we take the electronics firms as our analytical sample. This paper therefore sets out to estimate the impact of R&D on firm performance, in terms of productivity growth and the rate of return on investment, within the electronics industry in Taiwan, whilst also examining the Schumpeterian hypothesis, that R&D performance is an increasing function of firm size. Our examination of R&D performance is based on a panel sample of 83 large electronics firms, completely balanced over the period from 1994 to 2000, with series data of R&D capital also being constructed. Based upon the extended Cobb‐Douglas production function, a random effects model is developed with the estimations revealing that the output elasticity of R&D is around 0.19 and the average rate of return on R&D is around 22%. These findings clearly demonstrate that investment in R&D by these electronics firms has had an impact on their competitive advantage. Compared to the findings of previous studies, where the analytical unit of data was at firm level, here the rate of return on R&D is consistent with similar estimates for the US and UK, but lower than those for Japan. However, our estimations do not provide support for the hypothesis that the impact of R&D on productivity is an increasing function of firm size.