2010 Satellite Account Underscores Importance of R&D
Over the years, corporate sector has nailed out quite a lot of methods to improve profitability and, at the same time, to save more cost. In simpler words, either improve ROR or shorten the payback period. Both these phenomenon has lead to the inclusion of cost of capital in the decision making of the businessmen. The inclusion of these costs have made it increasingly difficult for the businesses to justify their decisions. It becomes increasingly more difficult if the business has gone corporate and thus is answerable to the public shareholders. Here, an interesting finding has revealed how cost of capital can be improved, and how would GDP of USA respond consequently.
According to a research conducted by the Bureau of Economic Analysis, a simple change in the treatment of R&D Cost as investment rather than expense could have produced growth 2.7% higher, $301 billion more than the current levels. This research was scheduled over the period of 10 years, i.e. 1998 to 2007, in which the satellite accounts were studied and the impact of increase in R&D investment was observed. By treating R&D costs as investments, businesses were able to reap out the due benefits by keeping R&D as its assets, and they could be offset against amortization or depreciation principle, depending upon the useful life or effectiveness of the research. As now R&D will be an asset, the Cost of Capital, in the form of dividends or interest, would change consequently. This change will help businesses in improving their ROR, but their payback periods are likely to increase with this change.
Now the national Income will include a big portion representing investments, rather than cut off profits, which was a consequence of expensing out whole R&D Costs. Currently the impact of R&D is about 6.3% in the current levels. The impact of this change was only evident because of many different sectors following this practice, namely Information – Communication Technology Industries, Biotechnology related industries and transportation equipment related industries. Biotechnology related industries hold the highest investment costs, about 44% of the investments. This report also helps in highlighting key business areas and potential investment opportunities for financial institutions.
Over the period of 10 years, it has also been observed that major investments have shifted from other industries to Biotechnology related industries. Information Technology industries also showed considerable improve in the R&D investments. Considering the sources of investments, business sector has major share in the total figure, followed by government and non profit institutions serving households.
Currently, as the economic turmoil has jolted the basis of most economic systems, it is a good way to realize the growth of a country, which projects it in a much improved way. But not all the countries have major investments in R&D. This approach is still new and is open to discussion. The future depends upon the way this new initiative will be welcomed by most critics and financial writers. Dongmei Li (2006) has shown a strong positive relationship between financial constraints and stock returns. So the potential is there for those countries which have major investments in the R&D. It provides a growth opportunity to the economic systems of developed and developing economies, and increased GDP is expected to earn people a better life style than the one they live with.
Bureau of Economic Analysis (2010, June 30th). 2010 Satellite Account Underscores Importance of R&D. 26th July 26, 2010 from http://www.bea.gov/newsreleases/general/rd/2010/pdf/R&DSA_2010.pdf
Dongmei Li (2006, Nov) Financial Constraints, R&D Investment, and Stock Returns: Theory and Evidence. 26th July 26, 2010 from http://www.mccombs.utexas.edu/news/research_calendar/FIN_Li_01_07.pdf
Lahart Justin (2010) Treating R&D as Investment, Rather Than Expense, Boosts GDP. 26th July 26, 2010 from http://blogs.wsj.com/economics/2010/06/30/treating-rd-as-investment-rather-than-expense-boosts-gdp/