The return on R&D versus capital expenditures in pharmaceutical and chemical industries

The impact of research and development (R&D) on firm performance is generally agreed to be positive, but the nature and extent of this impact share little agreement in the previous research. Using an improved, time series, cross-sectional regression model that accounts for both contemporaneous a...

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Bibliographic Details
Published in:IEEE transactions on engineering management 2003-05, Vol.50 (2), p.141-150
Main Authors: Ping-Hung Hsieh, Mishra, C.S., Gobeli, D.H.
Format: Article
Language:English
Subjects:
Business
Capital expenditures
Chemical industries
Chemical industry
Comparative analysis
Corporate planning
Economics
Feedback
Fixed assets
Investments
Market value
Mathematical models
Pharmaceutical industry
Pharmaceuticals
R&D
Regression
Research & development
Research and development
Research and development management
Return on investment
Studies
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Summary:The impact of research and development (R&D) on firm performance is generally agreed to be positive, but the nature and extent of this impact share little agreement in the previous research. Using an improved, time series, cross-sectional regression model that accounts for both contemporaneous and firm-specific serial correlation, as well as the feedback between firm profitability and investments, our study compares the rate of return from a dollar investment on R&D to a dollar investment on fixed assets in pharmaceutical and chemical industries. We find positive associations of R&D intensity and all variables of firm performance (net margin, operating margin, sales growth, and market value). We find that an investment in R&D earns an operating margin return much higher than the industry cost of capital. We also find that the effect of an investment in R&D on the firm's market value is about twice as much the effect of an investment in fixed assets. These findings have implications for corporate investment strategies, indicating that additional R&D investment is more likely to provide a firm with a unique and sustainable competitive advantage.
ISSN:0018-9391
1558-0040
DOI:10.1109/TEM.2003.810828