Journal of Business & Financial Affairs

Measuring Corporate R&D

Abstract

Natesa Prasad

The essay critically examines measurement of R&D. R&D capital and cited patents are used in the literature to measure R&D intensity and investigate market returns for R&D. The results are ambiguous. Previous literature suggests that patents are distinct from R&D expenditure, and R&D is influenced by competition. We suggest eight new measures based on the interplay between R&D and competition. We empirically test these measures on pharmaceutical and computer software industries which have the highest R&D intensities of all industries. The new measures are more significant than R&D capital and offer further insights on R&D in these industries. These measures help in capital allocation for R&D at firm level which maximizes stock returns.