Beyond the firm: how government R&D support and digital capacity shape firms’ R&D response to underperformance

Abstract Firms typically expand R&D in response to underperformance, yet research has treated this response as firm-centric and overlooked how national institutions shape its intensity. Building on the Behavioural Theory of the Firm and literature on government and institutions, we develop a cross-level framework in which two government levers, direct R&D support and digital capacity, shape the extent to which firms intensify R&D after underperforming. Using a 10-year panel of manufacturing firms, we find that underperformance is positively associated with R&D intensity and that both government R&D support and government digital capacity strengthen this relationship. We further hypothesise and empirically test that the moderating effect of government R&D support is particularly stronger where government digital capacity is high. These results are robust to multiple tests addressing econometric specifications and temporal coverage. Theoretical and practical contributions and avenues for future research are discussed.