Empirical Study on the Determinants of Industrial Research and Development Expenditures

Introduction

In numerous corporations, the allocation of research and development (R&D) expenditure is defined through period cost-based budget management. Two methods are considered when controlling R&D expenditures via annual budgets:

• 1.

  Determining and allotting the cap;

• 2.

  Accumulating individual projects.

As shown by Blake (1967) and Naslund et al. (1973), because of restrictions on resources, in practice, these decisions could often be taken by a compromise method. For example, a process such as uniformly reducing a budget proposal and revising it by negotiating additional budget allocations or rendering corrections based on past performances is adopted.

Suggested methods of determining the cap on R&D expenditures are as follows:

• 1.

  Setting it at a constant ratio according to the planned or predicted value of corporate performance or the measured performance value;

• 2.

  To uniformly maintain the R&D expenditures of the corporation, the cap is determined as a fixed value;

• 3.

  Based on R&D expenditures of similar companies, competitive R&D expenditures are estimated;

• 4.

  R&D expenditures are viewed as an investment to estimate the profits that could be earned through R&D, and this is determined as a standard.

As shown in the results of the questionnaires designed by Clive de Paula (1964), the Science and Technology Agency (1966) and Brockhoff (1994), two or more methods of deciding these caps are combined appropriately and finally revised while observing the fund balance.

The question is what type of internal or external factors are considered to define the R&D expenditure of the corporations.

The theoretical research conducted by Cohen & Mowery (1984) is considered to be a pioneering one. They categorized the determinants of R&D expenditures as factors internal to and external to a corporation, with the former referring to management resources and cash flow within the internal structure of a corporation, its research facilities, and corporate strategy. The internal structure of a corporation signifies its scope of authority, incentive system, information flow, and performance measurement. Corporate strategy signifies the selection of a product market and allocation of capital resources. The latter—factors external to a corporation—refers to market demand, growth rate, market concentration rate, technology opportunities of the market, and effectiveness of patents. “Technology opportunities of the market” refers to the varying opportunities for the success of a new product. Industries such as drugs and medicines and computers, for example, are high-opportunity industries, while a low-opportunity industry is iron and steel (Link & Long, 1981, p. 107).

Empirical studies include those based on single fiscal year data of manufacturing industries in the United States, including those by Grabowski (1968), Link & Long (1981), Mansfield (1981), and Link (1982).