R&D: when it does (and doesn’t) pay to invest
Imperial researcher Dr Jan-Michael Ross explains some of the factors that can make R&D investment worthwhile
Investing in extra research is all about finding out how best to exploit an uncertain market and the opportunities it offers. By uncertainty, we’re talking about the strength or tastes and trends in consumer demand – and it can help to know how to wait. This can be frustrating for companies on the brink of launch – their product is all ready to go and the last thing they want to do is hold off and spend more. But it’s risky to just throw the dice and see if it works anyway.
If you press ahead regardless, by the time you know what’s wrong with the product, it’s already out there and you’ve wasted your cash. This investment, which can’t be recovered, also makes it harder to change direction and follow other promising leads. Usually companies cut back on investment when conditions are uncertain – that’s well known. What we see from our research is that uncertainty can actually prompt more investment, but this is only worth it under certain conditions that we’ve identified below.
It’s only worth investing in R&D if a company has the right ‘human capital’: employees with the necessary expertise or scientific background to be able to conduct and learn from the extra research. If not, then money might be wasted.
Likewise, if companies focus on innovation within their core business, then the subsequent benefits are higher. This makes sense: companies can turn new information into valuable knowledge when the learning relates to their field of expertise. Companies that stumble across insights unrelated to their field might not know how best to exploit them and further investment could be risky.
But the anticipated benefits from this investment also depend on how mature a certain market is. For highly developed markets such as conventional pharmaceuticals, this extra research doesn’t yield such strong returns: competition is more intense, and innovations and gains are harder to come by. By contrast, younger sectors offer many more opportunities. Research investment in electric vehicles for instance is far more productive than in the well-developed market of petrol engines.
Companies facing an uncertain market might prefer to leave finance departments to judge whether investment in R&D is worth it. Our research suggests combining strategy with an entrepreneurial approach might help with decisions: you can actively manage uncertainties and avoid surprises with these extra, timely investigations. You can dip your toe into the market – and it might prompt you to pause or withdraw a project altogether. Uncertainty can offer huge opportunities, and this is a way of limiting any downside. Caution and targeted funds can offer a looking glass into the future.
The full version of this article can be found on IB Knowledge.