Innovation at a cost? Uncovering the dual-edged impact of R&D on conventional and Islamic banks in MENA

This study examines the nonlinear impact of research and development (R&D) investments on bank performance across 15 MENA countries from 2011 to 2023, using panel data quantile regression on 236 banks. Results reveal a U-shaped or inverted U-shaped relationship between R&D and profitability, contingent on initial performance. Less profitable banks initially suffer from high setup costs and inefficiencies, but R&D later enhances profitability after surpassing a critical threshold. Highly profitable banks, however, face diminishing returns from excessive R&D spending. Inverted U-shaped relationship also emerges between R&D and risk-taking, initial investments increase risk exposure, while subsequent spending improves risk management capabilities. The research contributes to literature in three ways. First, by applying quantile regression to uncover heterogeneous, threshold-driven effects missed by linear models. Second, by offering region-specific insights into the understudied MENA banking sector, which features both conventional and Islamic institutions. Third, by integrating resource-based view and agency theory to explain R&D’s dual-edged nature. Policy implications suggest regulators in emerging economies should design differentiated R&D incentives based on banks’ performance tiers. For managers, findings underscore the need for optimal R&D allocation that balances innovation pursuit with prudent risk management.

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