The R&D Risk-Return Trade-Off: Exploring the Diversity of Young Innovative Firms

Previous studies have established that young innovative companies (YICs), characterized by high levels of in-house research and development (R&D), exhibit a pronounced growth premium at the upper end of the conditional growth distribution and are therefore of particular interest to policymakers. We argue that the binary view underlying this literature - i.e., the R&D vs. non-innovator dichotomy - can be meaningfully extended to provide a better understanding of the relationship between innovation and growth in young firms. To this end, this paper develops an augmented YIC categorization that also includes non-R&D innovators and young firms that conduct R&D but have not yet brought an innovation to the market. Using panel data from Germany, we examine the growth trajectories of these different types of YICs. Our evidence suggests that non-R&D-oriented YICs, typically focused on the 'Learning by Doing, Using, and Interacting' (DUI) mode of innovation, exhibit a distinct growth pattern. They show improved economic performance relative to non-innovators, though less so than R&D innovators, while growing in a less risky and costly manner. A young firm's decision to engage in R&D for innovation and growth can, therefore, be understood as a specific risk-return trade-off. The paper concludes with implications for policy and further research.