The role of taxes in corporate research and development spending

This study replicates prior research regarding research and development (R&D) spending by sampling R&D spending for a cross‐section of firms in non‐service related industries. Compustat data for 231 firms from 1992 to 1998 are used to test whether the US Federal tax credit for R&D meaningfully influenced R&D spending of the sampled firms. Firms' (1) effective rate of R&D tax credit, (2) rate of decay in R&D capital for firms' primary industry affiliation, (3) financial cost of capital, and (4) marginal tax rate are used to compute firms' user‐cost of capital for in‐house R&D. Results show that firms that were eligible for the tax credit spent more on R&D than non‐eligible firms as the user‐cost of in‐house R&D increased. These results add further evidence regarding the role of the tax credit in stimulating R&D activity and suggest that a tax credit for incremental research can be used to boost private‐sector R&D spending.     

Strategic Control of R&D Resource Allocations in Diversified Businesses

Proper allocation of R&D resources across strategic business units is a challenge that has long been faced by executives of diversified business enterprises. Igal Ayal and Robert Rothberg have chosen to address this issue, applying a distinction between effectiveness and efficiency of R&D spending. Most companies seem to overcontrol such allocations in terms of tactical detail or efficiency considerations, and undercontrol in terms of strategic significance or effectiveness. Attention to the effectiveness of allocations requires that management assess the linkage between R&D spending and the attainment of overall corporate goals. The article draws conclusions about the design of appropriate R&D proposal generation and evaluation procedures and project control systems in strategically decentralized companies.     

R&D: Its Relationship to Company Performance

Decisions made by management today on investment in research and development can influence the viability and growth of a corporation into the 21st century. Graham Morbey reports on results of this study of R&D spending of major US companies for the ten-year period 1976 to 1985, including possibly controversial inferences concerning the relationship between R&D and company performance. He finds a strong association between R&D spending and subsequent growth in sales. However, he detects a threshold R&D funding level which must be exceeded if R&D is to contribute to future sales growth. The study shows little correlation between R&D intensity and growth in profitability. Also, it is apparent that sales growth and increasing profitability do not lead to increased allocations for R&D in most industries.     

Agricultural research spending must increase in light of future uncertainties

Agricultural productivity depends critically on investments in research and development (R&D), but there is a long lag in this response. Failing to invest today in improvements of agricultural productivity cannot be simply corrected a few decades later if the world finds itself short of food at that point in time. This fundamental irreversibility is particularly problematic in light of uncertain future population, income, and climate change, as portrayed in the IPCC’s Shared Socio-Economic Pathways (SSPs). This paper finds the optimal path of agricultural R&D spending over the 21st century for each SSP, along with valuation of those regrets associated with investment decisions later revealed to be in error. The maximum regret is minimized to find a robust optimal R&D pathway that factors in key uncertainties and the lag in productivity response to R&D. Results indicate that the whole of uncertainty’s impact on R&D is greater than the sum of its individual parts. Uncertainty in future population has the dominant impact on the optimal R&D expenditure path. The robust solution suggests that the optimal R&D spending strategy is very close to the one that will increase agricultural productivity fast enough to feed the World under the most populous scenario. It also suggests that society should accelerate R&D spending up to mid-century, thereafter moderating this growth rate.     

Product Development Strategy: An Integration of Technology and Marketing

Although it seems obvious that a new product development strategy must bring together marketing and R&D strategies, the conceptual development of marketing and R&D strategies has taken place in relative isolation. More than ten years ago, when Professor Harry Nyström began his research program on product development in Swedish firms, he realized that the isolation wasn't an appropriate point of view. He began to construct a conceptual framework for analyzing product development strategies that incorporated many more variables than had traditionally been considered. The latest set of firms in the research program are four pulp and paper companies. They are in mature, process industries, quite unlike the earlier study firms. Yet many of the same propositions from the earlier research still hold. In this article, Professor Nyström presents the most recent version of his framework to help managers develop an integrated product development strategy.     

Knowing when to leap: Transitioning between exploitative and explorative R&D

A common perspective is that consistent R&D investment facilitates innovation, while volatile spending implies myopic decision making. However, the benefits to exploiting extant competencies eventually erode, so firms must disrupt their R&D function and explore for new competitive advantage. We suggest that high‐performing firms recognize when extant competencies decline and increase exploratory R&D to develop new competencies at the appropriate time. We find that changes in R&D expenditure away from the firm's historic trend, in either direction, are indicative of transitions between exploitative and exploratory R&D and are associated with increased firm performance. Increases in R&D expenditure above the trend are associated with an increased likelihood of highly cited patents, suggesting that firms are making the leap between R&D‐based exploitation and exploration. Copyright © 2013 John Wiley & Sons, Ltd.     

R&D and marketing productivities from cross-sectional data: A study of German chemical corporations

Abstract
The adoption of EC-regulations in German law on annual corporate reporting has introduced two new formats for profit and loss statements. Using this newly available data from a sample of German chemical companies, production functions are estimated with sales as an output measure, and R&D and marketing as input measures. It is shown that these factors are peripheral rather than complete substitutes. Marginal productivities of the factors imply the opportunity for relative increases of R&D expenditure over marketing expenditure.     

The perilous leap between exploration and exploitation

Research summary : R&D‐based exploration and exploitation are necessary in order for firms to have sustainable competitive advantage. Yet, transitioning between these orthogonal types of R&D is considered profound organizational change. Building on recent research showing that compact, significant changes in R&D expenditure is an antecedent to the transition between explorative and exploitative R&D, I show that this leap between exploration and exploitation is quite hazardous. The magnitude of changes in R&D expenditure, whether increases or decreases, is positively associated with organizational failure. Firms maintaining higher levels of absorptive capacity are more capable of surviving the leap from R&D‐based exploitation to exploration, and firms that do not use reductions in R&D expenditure to manipulate short‐term earnings performance are more likely to survive the leap from exploration to exploitation. Managerial summary : In order to survive and thrive, innovative companies must be able to exploit their existing competencies, and to explore for new ones once those current competencies decline in value. However, transiting from one form of innovation to the other is difficult because the skills required to explore are fundamentally opposed to those required to exploit. In this article, I describe how difficult this leap between exploration and exploitation can be. I show that the move between R&D‐based exploration and exploitation is related to organizational failure. In addition, firms that are superior learners are more likely to survive the leap from exploitation to exploration, and firms that are not cutting R&D expenditure to manipulate earnings are more likely to survive the leap from exploration to exploitation. Copyright © 2015 John Wiley & Sons, Ltd.     

Is R&D risky?

Research summary : Many studies use research and development (R&D) intensity or R&D spending as a proxy for risk taking, but we have little evidence that either associates positively with firm risk. We analyze the relations between R&D intensity (R&D spending to sales) and R&D spending on the one hand and 11 different indicators of firm risk on the other, using data from 1,907 to 3,908 firms in various industries over 13 years. The analysis finds a general lack of consistent positive association between R&D and firm risk, making the use of R&D as an indicator of risk taking questionable. Furthermore, R&D intensity and spending do not correlate positively, suggesting they measure different constructs. We discuss potential reasons for these nonsignificant results. Our study demonstrates that researchers should avoid casual use of R&D as a proxy for risk taking without explicitly providing a clear definition and measurement model for risk. Managerial summary : Risk is a key construct in strategic management research. Many studies in this area measure risk taking by research and development (R&D) intensity (the ratio of R&D spending to sales) or R&D spending. However, since R&D intensity and spending have also been used to measure various other things such as information processing demands, this raises the question of whether R&D intensity and spending are valid indicators of firm risk. We examine this issue by considering the associations of R&D intensity and R&D spending with conventional measures of firm risk. We find a general lack of consistent positive association between R&D and firm risk, making the use of R&D as an indicator of risk taking questionable. Furthermore, R&D intensity and spending do not correlate positively, suggesting they measure different things. Copyright © 2016 John Wiley & Sons, Ltd.     

Theory versus practice in the staffing of R&D laboratories

The paper addresses the question of how far precept as revealed in the academic literature on staffing of industrial R&D organizations is reflected by practice in those organizations. The author has used the opportunity afforded by discussions with twenty-five middle- and higher-management staff in laboratories in four large European companies in the petrochemical, engineering and pharmaceutical industries to obtain an overview of their staffing practices.
Six aspects of staffing were enquired into: identifying and attracting persons with skills needed, selecting those satisfying organizational needs, developing the new recruit, measuring performance, appraising the individual's needs and career planning. The general impression was that the practices were remarkably similar, though some differences were observed between research- or discovery-oriented laboratories and development-oriented laboratories.
When compared with well-validated generalisations in the literature firms tend to use practices judged good in the literature though there are some significant deviations especially with respect to the value of the personal interview. In some respects firms use innovative practices not yet studied by academic researchers.     

How do country‐level governance characteristics impact the relationship between R&D and firm value?

This article addresses the question of how country‐level governance characteristics moderate the market valuation of research and development (R&D). Using a valuation model and panel data from companies in the European Union, United States, and Japan, we find that effective corporate governance allows the market to better assess a firm's R&D investments. This finding is the conjunction with the effect of the legal system, the financial system, and mechanisms of control. First, as effectiveness of investor protection increases, the market valuation of R&D projects also increases. Second, more developed financial systems do a better job assessing R&D. Third, effective control mechanisms reinforce the positive effect of R&D on a firm's market value. In sum, our findings shed light on how policymakers can increase the benefits from firms' R&D spending and thus foster economic growth and social welfare using these country‐level governance characteristics.     

The Effects of Taxes and Organizational Variables on Research and Development Intensity

Prior research has failed to reach consensus on which variables explain private-sector research and development (R&D) spending. This study extends prior research explaining R&D spending of firms in the US private sector by regressing R&D intensity on a number of tax and organizational variables. COMPUSTAT data from 113 firms in 1994 are used to estimate the effects of the variables on R&D intensity (used interchangeably with R&D activity). Ordinary least square estimates indicate that firms that were eligible for the R&D credit had higher R&D activity than firms that were ineligible. R&D intensity is a decreasing function of both capital intensity and the debt to capital ratio. Neither management stockholding nor diversification strategy meaningfully influenced R&D activity. The reported results have implications regarding US tax policy towards the tax subsidy for R&D. The results also help to clarify prior findings regarding a number of organizational variables on R&D intensity. One implication of these results for US tax policy is that private sector R&D intensity can be meaningfully influenced by the level of tax subsidy.     

Influence of R&D accounting conventions on internal decision-making of companies

Abstract
The convention currently in place (SSAP 13 revised) to account formally for industrial R&D expenditure is that qualifying development expenditure meeting strict viability criteria may be capitalised (treated as an asset) but that all other development and all research must be immediately expensed (written off). This study comprising interviews and postal responses was carried out to investigate the effect this convention has on managerial actions and decisions on R&D investment by companies, particularly by smaller high-technology ones.     

Effects of R&D policy choice on accounting performance and market value

Using primary data that was gathered from the annual reports of companies listed in the Chinese Stock Exchanges, this study analyzes and compares the different effects of R&D policy choice on their accounting performances and market values. For the period 2007 through 2014, the results show that different R&D policy choices provided different implications in firm value and firm strategy to the market. Specifically, the firms choosing to capitalize their R&D investments have higher market value, implying that the strategy was focused on sustaining their long-term development. On the contrary, the companies selecting to expense their R&D expenditure have higher accounting performance and the focus was on improving short-term gains. The results of this study suggest that the policy choice on R&D capitalization and expensing is a trade-off result between the accounting performance and the market value of a firm.     

The Credibility–Cooperation Connection at the R&D-Marketing Interface

Research and development (R&D) managers' perceptions of both marketing information and marketing managers are analyzed using an information and source credibility framework. The findings are based on a study of R&D directors in 80 technology-intensive companies and focus on activities and interactions during the new product development process. The authors found that the R&D managers' perceptions differed significantly in high and low integration companies. These perceptions also were influenced by various organizational practices. The R&D-marketing cooperation was highest where organizational practices were conducive to cooperation and R&D perceived marketing input as credible. Several implications for creating a corporate climate conducive to interfunctional cooperation are developed.     

Using IT Effectively in R&D Management23—25 September 1996, IMD, Lausanne, Switzerland

The commercialization of biotechnology requires very serious and intense research capabilities. The pharmaceutical industry has been one of the early exploiters of biotechnology because of the existence of such capabilities. This feature has been observed worldover and the literature is replete with information on how firms have evolved various strategies to meet this requirement. The present paper is an attempt to assess the R&D capabilities in the pharmaceutical companies in India in the context of biotechnology commercialization. A study was made of the R&D capabilities of 33 companies. These companies represent 3 categories of the Indian industry: purely medicinal chemistry based pharmaceuticals; diversified (both medicinal chemistry and biotechnology); dedicated biotechnology companies. Discriminant analysis was performed (i) to understand the distinctiveness of the three groups of companies and (ii) to understand the characteristics of their R&D capabilities. With respect to eight of the ten chosen parameters like R&D intensity, skill intensity, linkages, output of R&D, size, age, R&D manpower as a proportion of total manpower and number of skilled R&D employees, the three groups are observed to be distinct from each other.     

An empirical analysis of sustained advantage in the U.S. pharmaceutical industry: impact of firm resources and capabilities

The authors test a model of the relationships among firm resources, firm capabilities, and sustained competitive advantage between 1971 and 1989. Sustained comparative advantage was captured by two variables: therapeutic differentiation and global NCEs. The results show that R&D and salesforce expenditures have indirect and direct effects, respectively, on sustained competitive advantage. Firm capabilities were differentiated into component and integrative capabilities. Component capabilities were captured by the firm’s internal R&D efforts and therapeutic market focus, while integrative capabilities were concerned with the firm’s ability to obtain FDA approvals and to develop radical new drugs. Findings on each of these four capabilities on therapeutic differentiation and global NCEs are mixed. The direct and indirect effects of these resources and capabilities on therapeutic differentiation and global NCEs suggest important managerial implications in the way firms coordinate and combine their assets so as to achieve sustained competitive advantage. Copyright © 1999 John Wiley & Sons, Ltd.     

Convergence and unbundling of corporate R&D in telecommunications: is software taking the helm?

This paper presents a view of the changing structure of corporate R&D in telecommunications – one that is close to Adam Smith’s insightful and enduring idea of division of labor – that perhaps we are witnessing the beginnings of vertical disintegration and unbundling of important segments of the industry’s R&D activity. The paper maintains that the emergence of an independent software industry – aided by the convergence of computer, telecommunications and imaging technologies – and the rapid growth of technology-based alliances are at the heart of this trend. So extensive is the vertical disintegration of R&D that, in 1997, the top 10 independent software vendors in the US spent more on R&D than the combined spending by AT&T and Lucent whose sales were well over three times as large. It appears that the source of future innovation in the telecommunications industry lies not in its services segment but rather in telecommunications and Internet equipment firms and independent software firms. Increasingly, the fortunes of large service providers like AT&T will depend less on innovation and more on their ability to configure and market complete one-stop-shopping solutions to customers by combining internal resources with outsourced technologies, products and services.     

Career paths, technological obsolescence and skill formation: R&D staff in Britain and Japan

This paper examines how scientists and engineers working in industrial R&D cope with the pressures of business and technological change and develop their careers. The data is drawn from a survey of nearly 1000 R&D staff working in large industrial corporations in Britain and Japan. Cross national comparisons are used to explore similarities and differences in coping strategies and in the human resource management challenges for companies. Particular attention is given to the problems of potential mismatch between RBD staff career orientations and available career opportunities.     

Technological powerhouse or diluted competence: Techniques for assessing mergers via patent analysis

On a daily basis, we are bombarded with the news of yet another mega–merger. The business press generally greets these announcements with breathless projections based on extrapolations of combined sales, earnings, and R&D spending, with little emphasis on whether the merged companies will be worth the sum of their parts. In this paper we examine patent analysis techniques for evaluating the technological strength of merger candidates, and explore the notion that the technological quality of the merged company may be diluted rather than enhanced. We will also use patent analysis methods for examining the market value of companies, to determine whether a merger target is over– or under–priced. We will explore all of these techniques within the context of a case study of the proposed merger between Glaxo–Wellcome and SmithKline Beecham, although the techniques can be readily applied to any merger within an R&D intensive industry.