What is the relationship between a company’s R&D spending and economic returns. Is it correlated (positive or negative). Is there a causal relationship? There have been numerous studies trying to answer this question that have produced seemingly conflicting results. The author (Gina O’Connor) has been studying this and other innovation questions for two decades and she has an answer.
… we found no statistically significant relationship between a firm’s investments in basic, exploratory R&D … and the firm’s stock market value. … (but when) we measured (effect of) the presence of (an innovation function within a company) … we found that the level of these activities could turn the relationship between R&D and market performance from a slightly negative to a significantly positive one. … An innovation capability that goes beyond basic, exploratory R&D is the missing piece that produces market value. … It is only the interaction of innovation activity and basic, exploratory R&D that has a positive effect.
The article briefly explains why the combination of R&D and innovation (and why these need to be distinct capabilities) is the key. It is something that many companies seem to be confused about with the result being that many U.S. companies have slashed spending on basic, exploratory science and engineering research. This is a rational response if these companies have seen no return on their R&D spending. But the reason they haven’t isn’t because the research isn’t valuable, it’s because there is no path within the company to readily create the value that is possible. This is what a true innovation capability does.
This is a topic the author has much more to say about in her many publications. It is worthwhile for any and all innovation practitioners to pay attention to her extensive body of innovation work.