Wednesday, December 15, 2010

Should Firms Spend More On R&D And Advertising During Recessions?

Research made by Raji Srinivasan, Gary L. Lilien, & Shrihari Sridhar.
The abstract:

"Whenever a recession occurs, there is a heated dialog among marketing academics and practitioners about the appropriate levels of marketing spending. In this paper, we investigate when firms should spend more on R&D and advertising in recessions. We propose that the effects of changes in firms’ R&D and advertising spending in recessions on profits and stock returns are contingent on their market share, financial leverage and product-market profile (whether B2CGoods, B2BServices, B2BGoods, or B2CServices). We estimate the model using a panel of more than 10,000 firm-years of publicly listed US firms from 1969 to 2008 when there were seven recessions. Our results support the contingency approach. We compute the marginal effects, which show how the effects of changes in R&D and advertising spending in recessions vary across firms. The marginal effects provide evidence of inadequate spending (e.g., 98% of B2CGoods firms under-spend on R&D), proactivity (e.g., 96% of B2BServices firms are at about the right levels on advertising) and excess spending (e.g. 92% of B2CServices firms over- spend on advertising). Using our approach and publicly available data, managers can estimate the effects of their firms’ and competitors’ R&D and advertising spending on profits and stock returns in recessions."

Read the full paper by clicking here.