Pitfalls in Estimating the Returns to Corporate R&D Using Accounting Data

Abstract

Does R&D have an impact on firm growth, profits, and value? To most observers, the obvious answer is yes. However, the recent report by Booz-Allen-Hamilton (BAH 2006) seems to conclude that the share of spending devoted to research has no relationship to the economic performance of an enterprise, and offers support to the view that it is possible to compete successfully in the modern economy without investing in R&D. This issue is an important one because the large corporations they considered are responsible for the vast majority of private R&D spending in developed economies, and are therefore important actors in achieving the Lisbon agenda.Challenged by the results and recommendations of the BAH report, in this paper we assess some of the pitfalls to be avoided in using accounting data to estimate corporate R&D returns and illustrate a proper use of such data. We first offer a critique of important aspects of the methodology and of some of the main conclusions in the BAH report. Using similar data and a comparable approach, we then present our own estimates of the impact of R&D on the growth, profitability, and market value of public corporations, and contrast our interpretations and conclusions with that of the report. Submission to the First European Conference on Knowledge for Growth, October 8-9, 2007Keywords : New perspectives on the measurement, evalutation and impact of corporate R&D AbstractDoes R&D have an impact on firm growth, profits, and value? To most observers, the obvious answer is yes. However, the recent report by Booz-Allen-Hamilton (BAH 2006) seems to conclude that the share of spending devoted to research has no relationship to the economic performance of an enterprise, and offers support to the view that it is possible to compete successfully in the modern economy without investing in R&D. This issue is an important one because the large corporations they considered are responsible for the vast majority of private R&D spending in developed economies, and are therefore important actors in achieving the Lisbon agenda.Challenged by the results and recommendations of the BAH report, in this paper we assess some of the pitfalls to be avoided in using accounting data to estimate corporate R&D returns and illustrate a proper use of such data. We first offer a critique of important aspects of the methodology and of some of the main conclusions in the BAH report. Using similar data and a comparable approach, we then present our own estimates of the impact of R&D on the growth, profitability, and market value of public corporations, and contrast our interpretations and conclusions with that of the report.Our critique takes three parts: first, the data normally available in the financial accounts of firms is not well-suited to assessing the returns to R&D. Such expenditure is an investment in the future, but is generally treated by accountants as immediately expensable. There are also a number of issues in the interpretation of results based on gross versus net profits and in the robustnes...

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