IEBS Project

Synopsis
The Relationship between R&D activity and firm
profitability

Submitted on 14th January , 2011

By Group 8

Abhaya Brahma (PGP25225)

Amartya Ghosh (PGP 25063)
 The Relationship between R&D activity and firm
profitability
The Structure-Conduct-Performance paradigm has been utilized by industry experts
to explain the industry dynamics. The structure relates to the industry structure in
terms of concentration, conduct relates to the activities of the firms to survive in the
industry and performance relates to the profitability. The term Research and
Development (R&D) comes under the conduct and we aim to establish a
relationship between R&D (Conduct) and Profitability (Performance).

R&D expenditure is said to be the driver of value creation in some industries. Some
of the industries which are R&D intensive are pharmaceuticals, high-tech hardware
firms and software product companies. When the funds available to a company are
limited each function namely manufacturing, advertising and R&D competes for a
share of funds by striking claims that they lead to higher profitability for the firm.
This study examines the relationship between R&D expenditure and firm
profitability for pharmaceutical industry in India.

Indian pharmaceutical players have been known for producing generic drugs and in
the past taking the route of reverse engineering. Still some companies do have
substantial annual R&D spending. A cross section study of pharmaceutical
companies is done to determine the relationship between profitability and R&D
spending. Data regarding the profitability figures and the respective R&D
expenditures of pharmaceutical firms is collected. A regression is run to study the
variation of profitability with expenditures like R&D, advertising and other relevant
expenditures. The significance of each factor in the regression model is found out.

References
1. Koku P.S. (2010), R & D Expenditure and Profitability in the Pharmaceutical
Industry in the United States, Journal of Applied Management Accounting
Research, 2010, Vol. 8 Issue 1, p35-42
2. Hanel P., St-Pierre A. (2002), Effects of R&D Spillovers on the Profitability of
Firms, Review of Industrial Organization, 305–322, 2002
3. Ballester M., Garcia-Ayuso M., Livnat J. (2003), The economic value of the R&D
intangible asset, European Accounting Review 2003, 12:4, 605–633