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

Abstract

Does RD 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 RD This issue is an important one because the large corporations they considered are responsible for the vast majority of private RD 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 RD 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 RD on the growth, profitability, and market value of public corporations, and contrast our interpretations and conclusions with that of the report.