Research and Development Expenditure in Innovative Companies

Abstract

Investors in innovative technology sectors tend to part ways with fundamental valuation methods. It has proven to be impossible to properly value an innovative company of this era, albeit research suggests that a company’s research & development expenses could be the main ingredient of the secret success formula. Instead of trying to solve the impossible puzzle that is computing R&D expenses effect on future cash flows, this paper investigates the actual market capitalization progress of the top 30 R&D spenders from the 2012-2018 Global Innovation 1000 study by PwC’s strategy consulting business, Strategy&. The market capitalization of the top R&D spenders are later compared to the rest of the companies in the Global Innovation 1000 list, as well as their respective sector. The findings concluded that looking at the changes in market capitalization alone is not enough to determine R&D activities real effect on the market value. The hypothesis that higher research and development expenses in innovative companies will result in higher future market values, as well as the hypothesis that top R&D spenders will outperform their industries, cannot be rejected.