| Abstract: | Advertising and R&D outlays are more similar to than different from capital outlays in modern corporations. All three can properly be thought of as investments, and can be ranked and evaluated using the tools of modern capital budgeting. One problem with bringing advertising and R&D outlays into the same planning framework as capital outlays is the constraints implicitly imposed by suppliers of external capital on the use of funds they advance. These constraints basically restrict the use of external funds to capital projects. A simple model is constructed of the cash flow-maximizing firm faced with both market and internal funds constraints. This model shows that marginal productivity rules evolve for these outlays and that a multiplier process is present in the movement of advertising and R&D from one equilibrium to another. Implications of this view of advertising and R&D for financial managers are discussed. |
