R&D Spending: Dynamic or Persistent?

35 Pages Posted: 10 Oct 2015 Last revised: 21 Feb 2018

See all articles by Christophe Pennetier

Christophe Pennetier

INSEAD

Karan Girotra

Cornell Tech; Cornell SC Johnson College of Business

Jurgen Mihm

INSEAD

Date Written: February 2, 2018

Abstract

It is well established that returns to spending on research and development are positive and accrue over several years — that is, firms benefit from higher levels of cumulative R&D spending. We study how a given amount of such spending is best allocated, over time, to optimize R&D performance. Under a persistent policy, allocations remain nearly constant irrespective of circumstances; under a dynamic policy, R&D spending increases (resp., declines) when opportunities arise (resp., fail to materialize). We use a sample of 3,711 publicly listed companies, observed for seven years (on average) between 1982 and 2003, to compare the outcomes of these R&D allocation policies. We find that a dynamic allocation strategy is associated with worse R&D performance in terms of patent quantity and quality. Our results indicate that the originality of an invention, and also the firm’s familiarity with an invention’s technological basis, are factors that can mitigate or amplify the harm caused by variability. Finally, we establish that R&D performance suffers from the unpredictable part of dynamic spending; the predictable part has either no effect or a positive one.

Keywords: R&D Strategy, R&D Spending, Variability in R&D Spending, Innovation, Arellano–Bond GMM Estimation

Suggested Citation

Pennetier, Christophe and Girotra, Karan and Mihm, Jurgen, R&D Spending: Dynamic or Persistent? (February 2, 2018). INSEAD Working Paper No. 2018/03/TOM. Available at SSRN: https://ssrn.com/abstract=2671828 or http://dx.doi.org/10.2139/ssrn.2671828

Christophe Pennetier

INSEAD ( email )

Singapore

Karan Girotra (Contact Author)

Cornell Tech ( email )

111 8th Avenue #302
New York, NY 10011
United States

HOME PAGE: http://www.girotra.com

Cornell SC Johnson College of Business ( email )

Ithaca, NY 14850
United States

HOME PAGE: http://www.girotra.com

Jurgen Mihm

INSEAD ( email )

Boulevard de Constance
77305 Fontainebleau Cedex
France

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