Should Firms Spend More on Research and Development and Advertising during Recessions?

Abstract

Whenever a recession occurs, there is a heated dialog among marketing academics and practitioners about the appropriate levels of marketing spending. In this article, the authors investigate whether firms should spend more on research and development (R&D) and advertising in recessions. They propose that the effects of changes in firms' R&D and advertising spending in recessions on profits and stock returns are contingent on their market share, financial leverage, and product-market profile (i.e., business-to-consumer goods, business-to-business services, business-to-business goods, or business-to-consumer services). They estimate the model using a panel of more than 10,000 firm-years of publicly listed U.S. firms from 1969 to 2008, during which there were seven recessions. Their results support the contingency approach. The authors compute the marginal effects, which show how the effects of changes in R&D and advertising spending in recessions vary across firms. The marginal effects provide evidence of inadequate spending (e.g., 98% of business-to-consumer goods firms underspend on R&D), proactivity (e.g., 96% of business-to-business services firms are at approximately the right levels on advertising). and excess spending (e.g., 92% of business-to-consumer services firms overspend on advertising). Using the authors' approach and publicly available data, managers can estimate the effects of their firms' and competitors' R&D and advertising spending on profits and stock returns in recessions.

Strategies for Superior Performance in Recessions: Pro or Counter-Cyclical?

“…First, recessions reduce the demand for most firms' products and services (Srinivasan et al, 2011). This is due to lower employment, which leads to decreased disposable income, and it is also due to decreased consumption confidence created by job insecurity (Dutt & Padmanabhan, 2011;Hall, 2005).…”

“…Consumers become more price conscious (Hampson & McGoldrick, 2013) and "downtrade" to cheaper items and stores (Ang, Leong, & Kotler, 2000;Kaytaz & Gul, 2014) or substitutes (Dutt & Padmanabhan, 2011;Srinivasan et al, 2011). Discretionary such as leisure and luxury items suffer more (Mansoor & Jalal, 2011;Zurawicki & Braidot, 2005), while necessities such as housing and health care are less affected (Dutt & Padmanabhan, 2011;Kamakura & Du, 2012).…”

“…Reviews of prior studies are provided by Latham & Braun (2011), who note a positive link between counter-cyclical strategies and performance, and by Srinivasan et al (2011), who warn about mixed results. Most importantly, except for Navarro et al (2010) and Gulati et al (2010), the majority of research on the topic limits the analysis to one area: marketing, R&D or capital expenditures.…”

“…Advertising and promotions increase during expansions and are cut in contractions (Srinivasan et al, 2011), when most firms view them as dispensable luxuries (Apaydin, 2011). However, several authors recommend that companies focus on marketing and be more aggressive to capitalize on the changes in consumption patterns during downturns (Ang et al, 2000).…”

“…In particular, we answer a call for scholars to analyze how firms absorb and react to economic downturns (Kaytaz & Gul, 2014;Latham & Braun, 2008) and to examine organizational factors (Srinivasan, Lilien, & Sridhar, 2011) that influence investment preferences in these environments (Zona, 2012). To our knowledge, this is the first study to propose an integrative model with several variables to investigate recessions and to empirically test it with survey data.…”