R&D Intensity and the NPD Portfolio

30 Pages Posted: 22 Jan 2009 Last revised: 1 May 2013

Raul O. Chao

University of Virginia - Darden School of Business

Stelios Kavadias

University of Cambridge - Judge Business School

Date Written: January 20, 2009

Abstract

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.

Keywords: Research and Development, New Product Development, R&D Intensity, Innovation, Portfolio Management

JEL Classification: O32, D20

Suggested Citation

Chao, Raul O. and Kavadias, Stelios, R&D Intensity and the NPD Portfolio (January 20, 2009). Available at SSRN: https://ssrn.com/abstract=1330154 or http://dx.doi.org/10.2139/ssrn.1330154

Raul O. Chao (Contact Author)

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States
434-982-2681 (Phone)

Stylianos Kavadias

University of Cambridge - Judge Business School ( email )

Trumpington Street
Cambridge, Cambridgeshire CB2 1AG
United Kingdom

HOME PAGE: http://www.jbs.cam.ac.uk/research/kavadiass.html

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