Dynamics of resource allocation–firm performance relationship: Panel autoregressive distributed lag approach

Abstract

The present study aims to unravel the intricacies of the resource allocation–firm performance relationship by examining the impact of resource allocation to research and development (R&D), advertising, inventories, and wages and salaries on firm performance, considering both short‐term and long‐term dynamics This work is conducted using a sample of 240 listed Indian manufacturing firms over a time span of 18 years, that is, from 2006 to 2023. Based on the empirical findings from the dynamic panel autoregressive distributed lag (ARDL) model, it is revealed that, in the short term, allocating resources to areas such as R&D, advertising, inventories, and wages and salaries has a detrimental effect on sales. However, in the long term, these resource allocations show a positive impact on sales. Regarding stock market performance, both R&D and advertising exert a negative influence on Tobin's Q in the short term, but their impact becomes positive in the long term. In the case of inventories and wages and salaries, their effects evolve over time: Initially, in the short term, both have a positive impact on Tobin's Q, but this effect switches to negative and becomes significant in the long term. The key contribution of this study revolves around a model‐driven approach aimed at tackling the complex issue of resource allocation and its dynamic impact on performance outcomes.