April 21, 2008

Evolving models

In an economic downturn, it’s often said that strong companies should invest in R&D and capital equipment areas, so that they’re prepared with new products and efficient manufacturing techniques when the economy turns around as it always does. That’s easier said than done, as financial managers work to maintain margins by trimming all types of costs, especially in an era of rising fixed costs for energy and raw materials, which they mostly have little control over.

Indeed, R&D expenditures have historically been tied to the variances of economic growth, with particular exceptions like the pharmaceutical and semiconductor industries, which have growth cycles that are often different than the general model.

The economic models and organizational structures themselves are changing as well, which further disrupts the idea that companies can take “breathers” to rebuild themselves in a downturn. One of these changes is that large U.S. companies are becoming more global in their sales, operations, and R&D areas, and the global economy is mostly different than that of the U.S. So companies doing half their business overseas, whose economies show continued growth amid the U.S. slowdown, will likely continue to build their R&D budgets and resources following or exceeding those growth tracks. The collaborative nature of these operations will also limit the ability to reduce R&D investments for just one country, even if that country is the U.S.

All of these factors create complex economic models that are becoming more difficult to isolate for only one country or geographic region. And they also point to a more uniform and dedicated investment in R&D without regard to economic “up” or “down” cycles.

One might presume that the federal government would adopt and support this evolving model of uniform corporate investment, but indeed it does not. The R&D Tax Credit specifically continues to be an item that is not permanent and which needs almost annual review to see if it’s “really worth the effort.” The Small Business Innovative Research (SBIR) and Small Business Technology Transfer (SBTT) programs, while lasting longer are also not permanent and are currently undergoing review to determine if they too should be renewed.

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