The relationship between research and development spending and shareholder returns in high technology industries

This research explores the relationship between stockholder value creation and corporate R&D spending levels in fast-paced, high technology industries. R&D expenditures, expressed as a percent of revenues at the firm level, are correlated to the return to shareholders in later years. The semiconductor, computer, and software industries were selected as fast-paced industries. The pharmaceutical industry, a high-technology industry with a longer new product development and introduction cycle than the fast-paced industries, was chosen for comparison.; The years 1992–1994 were used to set the firms' routine R&D spending levels as a percent of revenues. Stockholder returns by firm were calculated as the compound annual return over the years 1993–1997, including both share price changes and reinvested dividends.; The industries with a fast-paced rate of change were found to have a negative relationship between routine R&D spending intensity and the actual stockholder returns experienced in succeeding years. The comparison industry, pharmaceuticals, tended to have a positive relationship between firm R&D intensity and the subsequent shareholder returns. The consistently negative correlation between firm R&D intensity and compound annual returns to shareholders in the fast-paced industries suggests that firms in those industries are overspending on R&D at the expense of their shareholders. The results of this work may have strategy implications for setting and managing R&D budgets in fast-paced technology firms.