R&D Project Entrenchment

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Description: "A common perspective is that consistent research and development facilitates innovation and enhances firm performance, whileith R&D volatility providesing evidence of myopic strategic decisions by managers. We develop an alternative perspective that focuses on R&D manager entrenchment, project opacity, and the capital budgeting process. We argue that successful firms follow a creative destruction approach and use internal staged financing to limit project entrenchment, leading to volatile R&D expenditures. We empirically test these competing theoretical perspectives on research and development volatility using a large cross-section of firms from 1995 to 2004. Consistent with the creative destruction hypothesis, we find that research and development volatility is positively related to several different proxies of R&D success and to firm performance. We also find that the most successful firms are able to reduce funding to under performing projects, limiting overinvestment in research and development. Overall, our analysis suggests that steady R&D expenditures, instead of facilitating technological innovation, may indicate managerial entrenchment and overinvestment."

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