Inderscience Publishers

Modelling the reciprocal and longitudinal effect of return on sales and R&D intensity during economic cycles

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The mutual relationship between profitability and R&D expenses has been studied by many researchers, yet extant research has not considered the effect of economic cycles on this relationship. Specifically, it is not known from prior literature if all economic cycles have the same effect on the relationship between profitability and R&D expenses. In this study, as an exploratory investigation, this important relationship is investigated during two consecutive economic cycles in the USA. We find that the profitability – R&D relationship is different in different economic cycles; further, economic cycles have different effects on the four industries investigated. Interestingly, the effect was not consistent across the two cycles studied. We conclude that R&D-oriented company strategies and public policies must be customised to the economic cycle; a successful strategy during downturn in one economic cycle may not work in the next economic downturn.

Keywords: chemical, electronics, machinery and transportation equipment manufacturing industries, corporate strategy, economic cycles, longitudinal data analysis, longitudinal path model, profitability, public policy, R&D intensity, R&D performance evaluation, return on sales

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