Corporate R&D Spending during a Recession

There is general agreement that technological competitiveness is vital to the economic well-being of business. Recent studies in the United States and Japan show that a company that invests in R&D at a level greater than its competition can be expected to experience a rate of long-term sales growth greater than competitors in the same industry(1-3). An investigation of scale economics has shown that R&D intensities of both differentiated and homogeneous businesses tend to increase with market share(4) This leads to the conclusion that high-share businesses have a proportionately greater technological impact in their markets. An examination of the relationship between R&D, market structure and estimates of economic profits shows a positive effect of R&D on firm market value(5). A study of the effect of institutional ownership on companies shows that R&D spending is inhibited by high levels of institutional ownership(6). These general correlations and many others on the interaction between R&D and company performance are based on times of overall economic growth. Our study specifically examines inter-firm differences of R&D spending during a recession. 1982 was chosen for analysis as the only year in the past decade when there has been a significant decline (2.5 percent) in real gross national product. During this period, many companies were faced with declining sales. PERFORMANCE DURING RECESSION An earlier investigation examined sales growth of 172 large, established companies during the period 1976-1985(2). Companies were classified as leaders if their sales growth over the ten-year period was at least equivalent to the growth in actual GNP. Laggard companies were identified if they showed growth at less than one-half the rate of GNP. Companies with intermediate growth rates were classified as also-rans. Using the same data base, the performance of these companies was examined specifically during the recession year 1982. The results are summarized in Table 1. (Table 1 omitted) It can be seen that 37 (67 percent) companies that were leaders over the ten-year period increased sales during the year of recession. On the other hand, 54 (93 percent) companies that were growth laggards over the ten-year period suffered sales declines in the 1981-1982 recession. Clearly, performance during a recessionary period dominates the overall long-term performance of a company. Most companies that suffered sales declines in this single recessionary year were destined to be sales laggards over the whole ten-year period. We hypothesize that companies that spend more on R&D leading to new or improved products will be less susceptible to decline in a period of recession. Previous studies have not examined company performance and R&D during a recession. The relationship between company R&D intensity levels in prior years and sales performance during the 1981-1982 recession is given in Table 2. (Table 2 omitted) Of the 172 companies examined, 59 increased sales during the recession and 113 had sales declines. Among the latter, 92 typically spent less than 3 percent of sales on R&D. Most companies (57 percent) that spent more than 3 percent on R&D increased sales during the recession. Of those companies that spent more than 5 percent on R&D, 70 percent showed sales increases in the 1981-1982 period. Analysis indicates that there is a significant difference in R&D intensity between companies with sales growth during the recession and those with sales losses. We would expect companies that spend more on R&D to have more new products or processes than companies spending less. In addition, newly introduced products from successful R&D should have desirable attributes that would make them less susceptible to sales losses in a recession. Although many factors can be important in determining the sales performance of a company, the impact of successful R&D during a recession is significant. …