Academic journal article Research-Technology Management

The Relationship between R&D and Company Performance: A Targeted Study of the Linkage between R&D Investment and Business Performance Identifies a Number of Positive Associations

Academic journal article Research-Technology Management

The Relationship between R&D and Company Performance: A Targeted Study of the Linkage between R&D Investment and Business Performance Identifies a Number of Positive Associations

Article excerpt

An understanding of the relationship between R&D investment and company performance is important both because of its relevance to setting R&D budgets and because it can inform some of the strategic choices made by a company's top management. This article draws on the extensive data available in R&D scoreboards and on other published work to explore the links between R&D and various business performance measures.

The main scoreboard used is the DTI 2006 R&D Scoreboard (1) which gives some 35 items of data for each of the top 1,250 global R&D investors (both listed and private companies). All data in the Scoreboard are taken directly from the audited annual reports and accounts of the companies concerned. Some information is also taken from the DTI 2007 Value Added Scoreboard (2) which gives extensive data on the top 750 European companies by value added, again extracted from company annual accounts. (Value added is defined as sales less the cost of bought-in goods and services.)

It is unfortunate that value added data are not available for United States and most Japanese companies because their accounts do not give enough information to allow value added to be calculated; this may change as countries outside Europe bring their accounting standards in line with IFRS (International Financial Reporting Standards).

The nature of the linkage between R&D and company performance would be expected to vary substantially between sectors. Clear links with performance would be expected only for sectors where R&D is a major competitive factor (such as pharmaceuticals or software) and would not necessarily be expected for the many sectors where R&D is much less significant than capital equipment (Capex), marketing or other input expenditures. Examples of the latter include oil & gas producers, mining, industrial metals, utilities and many food producers or telecom companies. However, even in companies where R&D is a key competitive factor, it will be a necessary but not sufficient condition because success will also depend on excellence in other areas. For example, successful R&D will have much less effect on the performance of a company that makes a large and ill-chosen acquisition or has poor marketing. Equally, a company that under-invests in R&D relative to its principal sector competitors will see a decline in the relative competitiveness of its products and services and this will soon be reflected in its business performance.

For companies with a high R&D intensity (R&D as percent of sales) for their sector, there will also be a point at which further increases in R&D give diminishing returns, but this will depend on sector, size and other factors discussed in the next section. This point may be well above the sector average; companies such as BMW, Nokia and Renishaw show high performance within their sector but have consistently invested in R&D at well above their sector averages.

There are two principal ways of investigating the R&D/ performance relationship: the statistical analysis of data on a large, heterogeneous set of companies, and the targeted approach, which focuses on particular sectors or behaviors. These two approaches are discussed in the next sections.

Statistical Approach

It would appear to be fairly easy to demonstrate a link between R&D and business performance by searching for a statistically significant association between an R&D measure and a business performance measure using all the companies in R&D scoreboards over a 3 5 year period. However, this is not easy in practice since there are at least six complicating factors which can partially or wholly invalidate studies of this type. These are:

* Sectoral differences.--There are 39 ICB sectors (3) but only about one-third of them have R&D intensity of at least 2.5 percent (see l) and many have Capex intensities larger than their R&D intensities. …

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