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Question

How does research spending effect the growth of a manufacturing company?

Answer

Introduction

 1.1Background

In this modern world, everybody agrees that research and development is the necessity that helps an organization stay in shape and face the competition. Zahra and Coven(1994)1 mentioned in their paper that innovation is the ―life blood of corporate survival and growth. OECD(1996) acknowledged the importance of knowledge in one of its paper2 as ‗the driver of productivity and economic growth‘. The paper further iterated that performance in all sectors including manufacturing and distribution can be maximized with the help of the knowledge and right policies. Niosi (1999) explains that in order to gain this knowledge, Research and Development, or R&D, is the route companies take. This R&D mostly takes place in three places—inhouse in the company laboratories, in the university laboratories or in the government laboratories. 3 It is a universally accepted fact that the R & D plays an important role in the long term economic growth. (Czárl&Belovecz, 2007). The innovation is needed in order to meet the customer‘s demand. It is also needed in order to capitalize the opportunities offered by the changing market and technical platforms (Baregheh, Rowley& Sambrook, 2009)

Smith and Tushman(2005)4 explain that there are two kind of innovative activities in a firm: exploratory activities and exploitative activities. They further explain that the right balance is needed between the two of these activities as too much of the exploitative activities can mean inertia and conservatism in the organization, while too much of exploration can kill the efficiency of the existing products. Hence the right balance is necessary between the two activities. And this balance is not necessarily needed for the financial outcome. In order to thrive in the competitive environment and create a brand value, exploration is necessary along with exploitation activities.

But Miller and Morris(1999) explains the innovation is facing lot of crisis right now. The track record of R&D is not too good. While everybody understands and acknowledges the importance of the innovation and R&D, the companies are wary about investing money in the R&D itself because not every dollar invested in the project gives and output. In fact, Miller and Morris(1999) express their dismay at the situation by citing a researcher who said that billions of dollars have been wasted in these failed attempts to innovate. The fact stands that even the pumping up of billions cannot help a project if the inherent assumption is wrong, or the process used is flawed from the start. They further say that on an average out of 3000 projects, only one project of R&D has chances of succeeding(Miller & Morris, 1999)5 . Moreover, Czárl&Belovecz (2007)6 explains that there is a huge lag between R&D and growth and hence it is difficult to measure the true effect of the R & D on the economic growth. This has created a sense of futility across the R & D practices and has further painted a dismal picture of R&D and its contribution. 

But despite of all kind of risk associated with the R & D measures, the R & D plays a very important role, especially in manufacturing industry where it can be used to reduce the cost of manufacturing itself and introduce new features in the product. With the three kind of innovations—product, service and process, it is indeed possible to offer the best product at the competitive price. 

 1.2 Declaration of Problem

The current research triesto find the relationship between research spending and compare it to various growth factors such as profits, sales and share value so as to understand how much R&D can actually impact the economic growth of the company. For this purpose, two major car manufacturing companies of Toyota and Fiat Chrysler are chosen as case studies. Both the companies have different approach towards the Research and Development. While Toyota is considered the leader in the field of Research and Development, Fiat‘s expenditure in the field of R & D is comparatively lesser . Their R&D laboratories span the world, and they are known for their huge investment in the field of research and development. This R&D is not only focused on the product, but also on the process and organizational changes so as to improve the efficiency of the whole system.

The research compares the performance of both the companies for a period of nine years. The research shows the different approaches to R&D spending by Toyota, Fiat Chrysler and compares their corresponding profits and brand value.

1.3 Research Objectives and Questions of Dissertation

The main objective of the research is to find if there is any relationship between R&D expenditure to the growth of the manufacturing companies Toyota and Fiat Chrysler. By comparing the two R&D expenditure and various growth indicators, it will be easy to surmise how the investment in R&D can affect the company‘s growth.

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