Topic: Effects of R&D and Advertising on Firm Performance across Economic Cycles: Evidence from U.S. Companies, 1971–2005

Speaker: Eric (Er) Fang，Assistant Professor of Marketing and International Business, University of Illinois at Urbana-Champaign

Time: 1:00-2:30pm, June 2, 2010

Location: Room217, New Building of GSM, Peking University.

Abstract

The critical role of R&D and advertising in the marketing strategy of the firm is well established. However, little research has been conducted on their effectiveness in relation to the general economic conditions in which the firm operates. In this paper, we investigate whether and in which direction the business cycle moderates the effectiveness of these two marketing instruments on two key performance metrics – market share and profitability – and whether these results depend on the cyclicality of the industry in question. Our empirical setting is 1,175 US firms across a time period spanning over three decades. We find that on average, aggregated across the years, R&D and advertising do contribute to firm performance. But, importantly, their effectiveness is not constant across the business cycle. Increasing advertising share in contractions has a stronger effect on profits and market share than increasing advertising share in expansion years. This effect is especially strong in highly cyclical industries. Similarly, investments in R&D in contractions lead to higher gains in market share and profit than R&D investments in expansions, albeit only in subsequent years. Firms that increase their R&D share in contractions should be prepared to see their profits decline in the short run. However, this decline in profits is amply compensated for in the subsequent years, for a total profit contribution that is higher than what can be expected in expansions.

Welcome to attend!