The R&D Cycle: The influence of product and process R&D on short-term ROI

The purposes of this paper are first to explore the relationship between the total R&D budget and two major components, product and process R&D, and second, to examine the relationship between these two types of R&D and the profitability of the business. The paper explores a cyclical pattern in the relationship between product and process R&D on the one hand and the short-term return on investment (ROI) of the business on the other hand. The total level of R&D investment plays a key role in this relationship. The foundation of this paper is based on prior work about the changing role of R&D over the life cycle of a new product or a new technology. It is also based on the notions of the S-curve response function and the limited compatibility between product and process R&D. The empirical part of the paper is derived from the PIMS database where the sampling units are strategic business units (SBU's). It is, therefore, different from studies where the focus of analysis is a single product or technology. Two forms of analysis are presented: correlation analysis of the hypothesized relationship and nonparametric tests of the stability of findings. The analysis assumes a lagged relationship between the investment in R&D and performance in terms of ROI. The primary conclusion is that product and process R&D modestly affect ROI two years later. The relationship appears to be different depending on the level of total R&D spending.