THE RELATIONSHIP BETWEEN INVESTMENT IN INNOVATION AND FINANCIAL SUSTAINABILITY: AN EMPIRICAL STUDY OF COMPANIES IN THE IBERIAN PENINSULA

Abstract

Sustainability, as defined by the United Nations' 17 Sustainable Development Goals (SDGs), necessitates responsible corporate practices that enhance long-term value and attract investors seeking sustainable performance. This study examines the causal relationship between investment in innovation and financial sustainability, an area where prior research remains inconclusive. The sample consists of 51 companies listed on the PSI (Portugal) and IBEX-35 (Spain) indices between 2011 and 2022. To analyse this relationship, the study employs multiple linear regression models with panel data, ensuring robust statistical inference. The Hausman test determined that a fixed-effects least squares approach was the most appropriate estimation method. Key findings indicate that financial sustainability positively influences innovation investment when lagged by one and two periods, but not in the current period. This suggests that investors and financiers require time to evaluate financial stability before allocating funds to innovation. Conversely, investment in innovation significantly impacts financial sustainability but in a dynamic and time-dependent manner. In the current and previous periods, the effect is negative, indicating that initial innovation expenditures might strain financial resources. However, two periods later, the impact becomes positive, reflecting the long-term benefits of innovation on financial health. Macroeconomic factors also play a role. Gross Domestic Product (GDP) significantly affects both financial sustainability and innovation investment, emphasizing the broader economic context in corporate decision-making. However, company size does not show a significant impact, suggesting that the innovation-finance relationship is not necessarily dependent on firm scale. Profitability indicators, such as return on assets (ROA) and return on equity (ROE), positively influence financial sustainability. However, they do not appear to drive investment in innovation, implying that firms do not directly reinvest profits into R&D. These findings offer important implications for managers, investors, and policymakers, advocating for strategies that balance financial sustainability with innovation investment. Aligning corporate policies with the UN SDGs can promote sustainable development, ensuring long-term economic resilience and environmental responsibility.