Our study shows that capital allocation efficiency has a positive influence on R&D investment. Specially, the positive relationship between capital allocation efficiency and R&D intensity is greater for diversified firms than for focused firms. We, further, find that diversified firms have a lower reduction in R&D spending than focused firms in the context of the credit shock. Interestingly, diversified firms having capital allocation efficiency positively foster R&D investment while their focused counterparts dramatically reduce R&D spending after the crisis. These findings exhibit a significant difference in R&D investment decisions between diversified firms and focused firms in the presence of capital allocation efficiency in an economic and financial shock. It indicates that the fit of capital allocation efficiency and diversification strategy enables diversified firms better cope with the shock as well as obtain a competitive advantage through fostering R&D activities in dynamic settings.