Corporate R&D expenditures in the UK

Corporate R&D expenditures in the UK



Corporate R&D expenditures in the UK

Recent figures (RD Scoreboard 2008) shows an “all companies” composite RD spend figure of £10.49 billion for the year 1997 as compared with £9.60 billion for 2006 (i.e., an increase of 9.3% in the total R&D spend). Companies spend these considerable sums of money on advertising and research and development in the hope of reaping the benefits from such expenditures in the future, rather than focusing on short-term shareholder gains. To quote Branch (2007), '…By taking advantage of high-yield high risk R&D opportunity, firms may increase their profits in two ways. First, profit relative to size may be increased by an above average return on R&D projects. Second, R&D-created new products may permit increased growth. Thus total profit may increase even if profits relative to size do not…'.

Product innovation, modernization, changing technologies, growing markets, and more and more emphasis on consumer wants and needs have all necessitated a considerable amount of investment in advertising and RD by firms in order to survive in the market. Investment in RD may be considered risky but it could be argued that only minimal capital is sunk at the start of the project and if the initial investment produces no result the project can be discarded. If the results are, however, good the further investment may be almost risk-free. Moreover, it could be argued that once an RD project is successful it not only benefits the current period but its benefits accrue in the future periods also, thus pointing to the intangible capital aspects of RD expenditures. Investment in successful RD projects helps companies in developing innovative products and new services, in reducing costs by acquiring modern technologies, and by enabling them to fight competition in the market. Highlighting the competitors' threat as one of the reasons for investment in RD, Beath et al. (2008) argue that competitors' threat is one of the critical determinants of a firm's R&D expenditures.

The relevant literature on firm size and RD indicates that the market valuation placed on RD might vary across firms of different sizes. One of the potential implications of the existence of any differences in the RD effectiveness across different firm size could be its impact on the market value of the firm. If there are size advantages in RD, the amount of money spent on these outlays will probably have greater effects on the market value of larger firms as compared to that of smaller firms.

It is a well-established fact that successful RD projects require large amounts of investments and larger firms, by virtue of their size, might be in a relatively better position to afford such large spending. In addition, industries that are characterized by rapidly changing technologies typically spend heavy amounts of money on specialized research and development to compete in the market. This, in turn, restricts the number of firms to a few that can sustain such huge ...