Stop R&D In Recession To

Protect Shareholders Value

Some Key Analysis
A positive, short-term relationship between
stockholder share price movements and
firm announcements of plans to increase
R&D expenditures.

Computer firm R&D intensity is correlated

to future stockholder compound annual
returns over both 1- and 5-year periods,
based on research activity and financial
results from 1992 to 1997.
Fact’s Stated By
Researchers
 Results indicate a statistically significant
negative relationship between routine R&D
spending intensity and actual stockholder
returns over both the 1 - and 5-year periods
studied.

This work suggests there are diminishing

returns to increased R&D spending in the
computer industry and that computer firms
are overspending on R&D at the expense of
their stockholders.
Contd..
Over time, there has been a documented
drop in the ratio of patents to R&D spending”
(Kortum, 1993), an indication that the
productivity of R&D might be decreasing.

Research shows that when low-technology

companies announce R&D expenditure
increases, their stock prices drop (Chan,
Martin and Kensinger, 1990).
Life Cycle Implications
Manufacturing breakthroughs are
particularly valuable during the growth
stage to improve productivity and yields.
However, during the mature stage of a
product or business life cycle, the profit
margins are expected to decrease. This
steady downward pressure on profitability
might exert pressure to reduce the firm's
R&D intensity as management struggles to
deal with reduced margins.
Contd..
The resulting higher than optimum R&D spending
levels generate "unnecessarily high costs and low
incremental returns" (Moore, 1995), and it is during
this phase that the "power of the R&D function
comes under challenge."

(in comparison to fixed R&D investment)It suggests

that firms that continue to spend funds at previously
established levels of intensity, when they should be
lowering their R&D spending, may be diminishing
returns to shareholders.
Hypothesis
1. Most of the firms in the computer industry
are entering the mature stage. Supporting
evidence would be decreasing R&D
intensity rates by the firms in the industry.

2. A bias exists toward policies that retain

excessively high R&D intensity. Firms that
have higher R&D intensities should provide
lower shareholder returns.
Final Result Of The
Analysis
Ten (10) out of the 14 firms for which data
was available over the time period recorded
a drop in R&D intensity. One firm had
remained constant and only 3 showed some
increase-1 of these 3 doubled.

The average R&D intensity of these 14 firms

decreased from 8.73% in 1992 to 7.39% in
1997. The Student's T test confirmed this
observation with an 80% confidence that
industry R&D intensity had decreased.
Nokia Cuts Production,
Closes R&D Facility
NOKIA will "streamline" global research and
development activities, which means it will cut up
to 250 R&D jobs in Finland and another 100 or so
worldwide, company officials told the Financial
Times.

Nokia's goal is to cut R&D expenses down to 9-10

percent of net sales by the end of the year.

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

Jyvaskyla, Finland.
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 five

per cent to eight per cent of its 10,000
researchers.
US R&D Expenditure
Forecast
The forecast estimates that 2009 R&D
spending 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 2.9
percent decrease in federal support and a 1.3
percent decrease in industrial funding, as
expressed in inflation-adjusted dollars. 
Researcher’s Forecast
Booz Allen Hamilton researchers, in their “Global
Innovation 2007” report, found—as in 2006—no
statistically significant connection between the
amount of money a company spent on innovation and
its financial performance.

A report at the start of the year by Batelle R&D

Magazine predicted sluggish R&D growth of just 3.4
percent, an inflation-lagging forecast taken before the
recent roiling of the stock and credit markets.
Organization Specific
Forecast
The National Science Foundation and NASA, the two
most prolific innovators in the government, saw their
2008 budgets cut from last year. NASA is projected to
have its funding for 2009 slashed again— no small
matter at an agency whose innovations have
improved everything from breast-cancer screening to
highway safety to wildfire control.

Investment in R&D has been reduced by .07% in 28

companies- The Wall Street Journal.
Impact On UK Economy
R&D budgets lose £4bn to the recession.
Faced with the recession, nine out of 10 UK firms
cut their capital expenditure, a key test for
innovation, by up to 50%-Management
Consultancies Association.
Frowning at the cutbacks, nine out of 10
consultants said innovation was the key to
defying the downturn.
Findings add that, over the past two years,
innovation has slipped far down the CEO’s to-do
list at around half of firms, suggesting the
recession is not entirely to blame.
CHARTS-”The final blow”
To Avoid R&D Investment
One option is to expand cooperative
research efforts, such as SEMATECH in the
semiconductor industry. In this
semiconductor case, the participating firms
spread some of the R&D risk while
benefiting from the breakthrough
technologies developed.

Another mechanism might be the

acquisition of technology through business
mergers and acquisitions. 
Conclusion
 “Consistent with the expectations, the computer industry
is undergoing a reduction in their R&D intensity ”.
 The consistently negative correlation between firm R&D
intensity and compound annual returns to shareholders
suggest that firms in the computer industry are
overspending on R&D.(which should be stopped in
recession)
 Anlaysis of pharmaceutical industry also came up with
point that there overspending on R&D is giving them no
return, 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 every
country and company is going the same way.
 THANK YOU
SOMYA JAYASWAL
NITIN VASHISHTHA
ANUJ SETIA
SAKET BAJLA
RITESH SAHA
SHIVENDRA B. SINGH
VIKAS VERMA
RAJAT GARG
ROHIT ABROL