Firm Profitability Drivers in the Automotive Sector: Evidence from ROA-Based Analysis

This study investigates the key determinants of firm profitability in the global automotive sector, examining whether superior returns on assets (ROA) stem from operational efficiency, strategic leverage, or innovation intensity, and highlighting the potential trade-off between efficiency and investment in capital-intensive industries. Analysing a global panel dataset of 192 automotive firms from 38 countries over 2010-2024, a fixed-effects regression model with Driscoll-Kraay standard errors was applied to control for unobserved heterogeneity, heteroskedasticity, and cross-sectional dependence across 11 financial and strategic variables. The findings reveal that firm size and inventory turnover are significant positive drivers of profitability, while research and development (R&D) intensity exerts a strong negative impact. The positive association with the effective tax rate reflects reverse causality, where more profitable firms incur higher tax burdens, rather than a causal effect of taxation on performance. Notably, working capital management, leverage, sales growth, and capital expenditure showed no statistically significant effects after controlling for firm and time effects. Temporal fluctuations, including a marked profitability decline in 2024, underscore the sector’s sensitivity to macroeconomic shocks. This study contributes robust, large-scale empirical evidence on the short-term profitability trade-off associated with R&D intensity in a globally integrated industry, addressing cross-sectional dependence through its methodological approach.