Understanding the complex relationship between R&D investment and firm growth: A chaos perspective

Abstract

Time delays and feedback loops often introduce nonlinear, dynamic, chaotic, or disorderly business patterns. In this paper, we argue that a firm’s growth driven by R&D can also exhibit chaotic behavior, through a simple model, where R&D has two distinct impacts on its revenue through the demand-inducing and cost-increasing effects. On the basis of a revenue-based investment strategy with anchoring and adjustment, the firm’s growth dynamics are characterized by a two-dimensional dynamical system under either the cost-plus or profit-maximizing pricing policies. Theoretical and numerical studies are used to show that growth can drive stable, periodic, and even chaotic behaviors. The findings suggest that R&D investment has more complex impacts on growth than previously envisioned, and that managerial decisions about R&D investments can cause fluctuations and erratic growth patterns in nonlinear and complex business environments.