bp (2).2003 format-stop r&d in recession

8/14/2019 Bp (2).2003 Format-stop r&d in Recession

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Some Key Analysis

A positive, short-term relationship betweenstockholder share price movements andfirm announcements of plans to increaseR&D expenditures.

Computer firm R&D intensity is correlatedto future stockholder compound annualreturns over both 1- and 5-year periods,based on research activity and financialresults from 1992 to 1997.


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Facts Stated ByResearchers

Results indicate a statistically significantnegative relationship between routine R&Dspending intensity and actual stockholderreturns over both the 1 - and 5-year periodsstudied.

This work suggests there are diminishingreturns to increased R&D spending in thecomputer industry and that computer firmsare overspending on R&D at the expense of their stockholders.


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Contd..Over time, there has been a documenteddrop in the ratio of patents to R&D spending(Kortum, 1993), an indication that theproductivity of R&D might be decreasing.

Research shows that when low-technologycompanies announce R&D expenditureincreases, their stock prices drop (Chan,Martin and Kensinger, 1990).


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Life Cycle Implications

Manufacturing breakthroughs areparticularly valuable during the growthstage to improve productivity and yields.However, during the mature stage of aproduct or business life cycle, the profitmargins are expected to decrease. Thissteady downward pressure on profitabilitymight exert pressure to reduce the firm'sR&D intensity as management struggles todeal with reduced margins.


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Contd.. The resulting higher than optimum R&D spendinglevels generate "unnecessarily high costs and lowincremental returns" (Moore, 1995), and it is duringthis phase that the "power of the R&D functioncomes under challenge."

(in comparison to fixed R&D investment)It suggeststhat firms that continue to spend funds at previouslyestablished levels of intensity, when they should be

lowering their R&D spending, may be diminishingreturns to shareholders.


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Hypothesis1. Most of the firms in the computer industry

are entering the mature stage. Supportingevidence would be decreasing R&Dintensity rates by the firms in the industry.

2. A bias exists toward policies that retainexcessively high R&D intensity. Firms thathave higher R&D intensities should providelower shareholder returns.


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na esu eAnalysis

Ten (10) out of the 14 firms for which datawas available over the time period recordeda drop in R&D intensity. One firm hadremained constant and only 3 showed someincrease-1 of these 3 doubled.

The average R&D intensity of these 14 firmsdecreased from 8.73% in 1992 to 7.39% in1997. The Student's T test confirmed thisobservation with an 80% confidence thatindustry R&D intensity had decreased.


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Nokia Cuts Production,

Closes R&D FacilityNOKIA will "streamline" global research and

development activities, which means it will cut upto 250 R&D jobs in Finland and another 100 or soworldwide, company officials told the FinancialTimes .

Nokia's goal is to cut R&D expenses down to 9-10percent of net sales by the end of the year.

Nokia also plans to shut down one R&D center in

Jyvaskyla, Finland.


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Pfizer To Lay Off Researchers Worldwide

ACCORDING To MARTIN MACKAY(head of Pfizer's research and development)

Pfizer is laying off 800 researchers worldwide.

By the year end, it expects to have laid off fiveper cent to eight per cent of its 10,000

researchers.


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US R&D ExpenditureForecast

The forecast estimates that 2009 R&Dspending in the US will reach $383.5 billion.Up 1.75 percent from the approximately$377 billion in 2008.However, when corrected for inflation, real

spending will decrease by about 1.6 percent. This decrease arises from an expected 2.9percent decrease in federal support and a 1.3percent decrease in industrial funding, asexpressed in inflation-adjusted dollars.


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Researchers ForecastBooz Allen Hamilton researchers, in their GlobalInnovation 2007 report, foundas in 2006nostatistically significant connection between theamount of money a company spent on innovation andits financial performance.

A report at the start of the year by Batelle R&DMagazine predicted sluggish R&D growth of just 3.4percent, an inflation-lagging forecast taken before the

recent roiling of the stock and credit markets.


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Organization SpecificForecast

The National Science Foundation and NASA, the twomost prolific innovators in the government, saw their2008 budgets cut from last year. NASA is projected tohave its funding for 2009 slashed again no smallmatter at an agency whose innovations haveimproved everything from breast-cancer screening tohighway safety to wildfire control.

Investment in R&D has been reduced by .07% in 28companies- The Wall Street Journal.


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Impact On UK EconomyR&D budgets lose 4bn to the recession.Faced with the recession, nine out of 10 UK firmscut their capital expenditure, a key test forinnovation, by up to 50%-Management

Consultancies Association.Frowning at the cutbacks, nine out of 10consultants said innovation was the key todefying the downturn.

Findings add that, over the past two years,innovation has slipped far down the CEOs to-dolist at around half of firms, suggesting therecession is not entirely to blame.


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CHARTS-The final blow


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To Avoid R&D InvestmentOne option is to expand cooperativeresearch efforts, such as SEMATECH in thesemiconductor industry. In thissemiconductor case, the participating firmsspread some of the R&D risk whilebenefiting from the breakthroughtechnologies developed.

Another mechanism might be theacquisition of technology through businessmergers and acquisitions.


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ConclusionConsistent with the expectations, the computer industryis undergoing a reduction in their R&D intensity .

The consistently negative correlation between firm R&Dintensity and compound annual returns to shareholderssuggest that firms in the computer industry areoverspending on R&D.(which should be stopped inrecession)Anlaysis of pharmaceutical industry also came up withpoint that there overspending on R&D is giving them noreturn, and hence it should be stopped.Not only I.T and pharma industry is cutting down R&D

expenses. EU also report proves that each and everycountry and company is going the same way.


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THANK YOUSOMYA JAYASWALNITIN VASHISHTHAANUJ SETIA

SAKET BAJLARITESH SAHASHIVENDRA B. SINGHVIKAS VERMARAJAT GARGROHIT ABROL

bp (2).2003 format-stop r&d in recession

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