R&D Intensity and the NPD Portfolio
Raul O. Chao
University of Virginia - Darden School of Business
University of Cambridge - Judge Business School
January 20, 2009
A key metric for the assessment of innovative activity at the firm level is R&D intensity. R&D intensity is the ratio of a firm's R&D investment to its revenue (the percentage of revenue that is reinvested in R&D). Empirical and anecdotal evidence suggests that R&D intensity within an industry is remarkably consistent. Despite this consistency in R&D spending, firms tend to be differentiated with respect to their NPD portfolio strategy and overall performance. This study aims to explain the observed consistency in R&D intensity for firms within an industry, despite the varying choices in terms of how much the firm invests in R&D and how resources are allocated among projects in a portfolio. We consider the implications of firm level factors, such as NPD portfolio composition, as well as industry level factors, such as competition intensity and environmental stability. We find that R&D intensity alone does not explain firm performance. Rather, it is the proper alignment between R&D intensity (how much the firm invests) and NPD portfolio strategy (how the firm invests the money) that drives profitability. More importantly, the proper alignment critically depends on two industry factors - competition intensity and environmental stability.
Number of Pages in PDF File: 30
Keywords: Research and Development, New Product Development, R&D Intensity, Innovation, Portfolio Management
JEL Classification: O32, D20
Date posted: January 22, 2009 ; Last revised: May 1, 2013
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