Don’t pinch pennies with R&D dollars

TEXAS A&M (US) — To remain successful, manufacturing firms need to continue to invest in marketing and research and development—even at a time of recession and cutbacks.

Researchers examined manufacturing firms on the Fortune 500 list for a period of 25 years, weighing a variety of firm- and industry-specific factors.

The study showed that investing capital in both marketing and research and development has a direct positive effect on a manufacturing firm’s survival as a member of the elite Fortune 500 list—the firms that account for nearly three-fourths of the U.S. GDP.

In fact, the researchers found that if a Fortune 500 manufacturing firm was to incrementally spend 1 percent of its average sales revenues on marketing and another 1 percent on R&D for five years, that investment would reduce the firm’s risk of leaving the list by 27.8 percent.

This is significant, says Venkatesh Shankar, professor of marketing at Texas A&M University. “The firms that stay on the Fortune 500 list enjoy a lot of benefits,” such as lower cost of capital and increased reputation and brand equity.

Fortune 500 firms also see increases in their share prices specifically associated with their entry into this list. Alternately, a fall from the list can be a precursor to negative events, like bankruptcy and hostile takeover.

Using this investment strategy can “significantly decrease the hazard of exiting the Fortune 500,” says Shankar. This strategy would also apply to companies that aspire to be on the list.

“These firms pour billions of dollars into R&D and marketing, yet no study has examined this important issue in depth,” Shankar says.

“The findings are important not just for marketers, but for senior executives in manufacturing, operations, innovation management, and top management as well.”

Not all firms benefit equally by the two areas of investment, however, the study reveals.

Firms that are in high-growth industries, such as technology, see a greater impact from marketing investment. Firms in slow-growing or mature industries, such as cosmetics or packaged food, see greater returns from investment in R&D.

Similarly, in any industry during periods of high growth, investing marketing capital is more effective and in times of low growth, investing R&D capital is more effective.

Shankar says the findings broadcast an important message for
managers: view marketing and R&D not as expenses, but rather as long-term investments that need to be employed strategically in industries and periods of high and low growth.

Many firms are cutting back in these areas to boost short-term profitability during a rocky economic period, he says.

“That can be very dangerous, because while, they may see immediate results, over the long run it could be detrimental.”

The Marketing Science Institute has accepted the paper for future publication.

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