Companies may spend less on research and development (R&D) than would benefit society because they bear the cost and risk of a project but may not capture all of its eventual gains. That does not mean consumer companies as a group are proven to underinvest, or that a bigger R&D budget automatically produces better products. The evidence on corporate short-termism is contested, and the effects consumers feel depend on what research produces, whether it reaches the market, and how much competition and reliable quality information buyers have.
Why can a company rationally spend less on R&D than society would prefer?
A company decides whether a project is worthwhile largely by comparing its expected costs with the benefits it expects to capture. Society’s calculation is broader: a successful project may help customers, suppliers, workers, or other firms as well as the company that paid for it. When those wider gains are not reflected in the company’s expected return, private investment can fall short of the level that would maximize wider benefit. This is a familiar rationale for public support of business R&D, not proof that any particular company or industry is spending too little.
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Costs, uncertainty, and time
Research requires spending before its outcome is known. A project may fail, take longer than expected, or produce a result that is technically promising but commercially impractical. Even a successful project can take time to develop, manufacture, and sell. The OECD’s 2016 analysis of government financing for business R&D and innovation identifies cost, uncertainty, time to returns, and potential spillovers as reasons private incentives may not match wider social benefits.
Spillovers and the difficulty of capturing returns
Knowledge, trained employees, and follow-on ideas can benefit people beyond the original investor. Competitors may learn from a discovery, or a new technical capability may support later work by others. A company may therefore expect to capture only part of the value its research creates. The larger the gap between a project’s private return and its wider benefit, the weaker the company’s financial incentive to fund it.
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Financing and management pressures
Financing constraints or management incentives tied to near-term earnings can also affect a firm’s choices. These are plausible mechanisms, but the evidence summarized here does not establish their relative importance across consumer companies. A 2001 study on short-term R&D bias argues that analyst and shareholder preference for lower-risk, shorter-term product R&D can influence time-to-market choices when competition is centered on cost rather than innovation. That is a conditional argument about particular competitive circumstances, not a general finding about all firms.
Does shareholder short-termism explain corporate underinvestment?
It may influence decisions in some firms or situations, but the claim that it broadly explains weak long-term investment is disputed. The OECD’s 2021 review, The Future of Corporate Governance in Capital Markets Following the COVID-19 Crisis, describes arguments that companies favored immediate results over productive investment after the 2008 financial crisis. It also says the evidence is inconclusive: one line of analysis finds increased short-termism, while critics point to sluggish capital expenditure alongside continued growth in R&D.
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Those aggregate trends do not settle why a given firm chose its R&D budget. The OECD cautions that the cited investment figures concern listed firms and gross investment; they cannot, by themselves, prove or disprove short-termism. Steven N. Kaplan’s 2018 review, “Are US Companies Too Short-Term Oriented? Some Thoughts,” likewise concludes that there is very little long-term evidence consistent with predictions made by short-termism critics. It is a review and interpretation of the debate, not a causal experiment establishing what drives every company’s decisions.
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How does R&D spending translate into product quality?
R&D is an input, not a quality score. It can support better performance, safety, durability, energy efficiency, usability, or new product varieties, but the connection is indirect: projects can fail, successful work may not reach production, and products may not meet users’ needs. A spending increase therefore does not guarantee a noticeable improvement for buyers, while useful improvements can arise from work that is not readily visible in a company’s reported R&D figure.
Comparisons also require care because companies’ definitions and accounting allocations of R&D vary. Patents are an incomplete proxy for innovation: defensive patenting may not represent a useful product advance, and some outputs are difficult to quantify. The OECD’s 2023 theoretical perspective on competition and innovation cautions against treating any one input or output measure as a complete account of innovation.
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- Investment input: compare R&D amount or intensity only with the accounting definition, period, company scope, and sector made clear.
- Innovation output: look for launches, meaningful product changes, independently measured performance, or validated technical results; patent counts alone do not establish quality.
- Consumer outcome: assess the relevant product category’s reliability, safety, durability, performance, and variety.
Why can competition and quality information matter as much as spending?
Firms can have an incentive to innovate when better products help them win customers. Coordination that weakens this pressure can reduce the incentive to develop or release improved alternatives. In a specific example, the OECD’s 2023 report The Role of Innovation in Competition Enforcement describes a February 2023 action by South Korea’s Fair Trade Commission against Mercedes-Benz Group, BMW, Audi, and Volkswagen concerning coordination on emissions-cleaning technology. The OECD reports that the KFTC concluded the conduct restricted development and release of new diesel cars that could have achieved better gas-reduction performance, limiting innovation and consumer choice. This is the regulator’s conclusion in one automobile case, not a general estimate for other industries.
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Choice also depends on whether buyers can judge quality. In its 2019 report Trust and Online Markets, the OECD distinguishes experience goods, whose quality becomes clear through use, from credence goods, whose quality may remain difficult to observe. When buyers cannot readily assess quality, they may rely on brand names or other imperfect signals. Weak quality information can reduce pressure on firms to improve and can make it harder for new competitors to persuade customers to try their products.
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Can consumers contribute to product innovation themselves?
Yes. A 2012 study by Eric von Hippel, Jeroen P. J. de Jong, and Stephen Flowers surveyed 1,173 UK adults and estimated that 6.1%—nearly 2.9 million people—had developed or modified consumer products in the preceding three years. The authors also estimated that annual household product-development spending exceeded 1.4 times the annual consumer-product R&D spending of all UK firms. These are estimates from that study’s UK definitions and period; they do not show that household innovation replaces firms’ research or establish the same ratio elsewhere.
What should buyers look for when judging a company’s innovation record?
A budget number alone cannot tell a buyer whether a product is better or whether a market offers meaningful alternatives. A more useful assessment connects spending to outcomes and market conditions:
- Check whether claimed advances appear in products customers can actually buy, rather than only in announced projects or patent totals.
- Look for independent evidence on category-specific outcomes such as reliability, safety, durability, or performance.
- Consider whether buyers have credible alternatives, new firms can enter, and customers can switch when products disappoint.
- For hard-to-assess products, consider what evidence is available before purchase, such as independent testing, warranties, or other verifiable quality information.
These are practical comparison axes, not a standardized OECD score. They help distinguish the amount a company spends from what its innovation delivers and what consumers can verify.
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