Throughout the first 150 years of its history the United States spent a total of approximately $18 billion for research.1 This total of a century and a half was matched in the single year 19632 and is expected to double to $36 billion in 1974.3 Moreover, during the 1960’s an estimated $200 billion will be spent for research by American industry and non-profit organizations, a sum three times the amount spent in the fifties.4
Such a magnitude and growth rate of research outlays, coupled with the fact that 75 percent of all research is performed (not financed) by industry,5 cannot help but affect an investor’s appraisal of a firm’s common stock. It is the purpose of this article to illustrate the magnitude and relevancy of research, both to the economy as a whole and to the single firm, and to provide a theoretical framework by which the investment analyst can evaluate a company’s expenditures on R and D.
The term research and development will generally be abbreviated as R & D in this article. The term has been given so many meanings and definitions that it is necessary to state what it signifies here. “Research” is the “activity of extending the bounds of knowledge”.6 “Development” herein refers to the “adaptation of the state of existing knowledge to particular commercial circumstances”.7 Excluded from this definition are routine product testing, market research, sales promotion, sales services, research in social science or psychology, and other non-technical activities.