Faculty Scholarship 1994 - Present

The Effects of Research and Development on Value Added: An Exploration of a Comprehensive Measure of a Firm's Financial Wealth and Well-Being

Much has been written about the effect of research and development, traditional accounting measures, and productivity as measures of wealth creation and efficiency, however, little attention has been paid to value added as a measure of performance. The purpose of this study is to explore the impact of various performance measures such as R & D intensity, capital intensity, inventory turnover, return on sales, productivity, and firm size on value added. The results indicate that there is a statistically significant and positive relationship between value added and R & D intensity, return on sales, productivity, and firm size. This suggests that these independent variables are positively associated with and contribute to the dependent variable value added. The significant of this research is designed to contribute to value chains and business processes in the global competitive environment. Future study of the value added concept as a performance measure of wealth creation in a firm is warranted. Value added, according to DTI, can be defined as a firm?s total sales less the cost of bought-in goods and services (Pearson, 2008). It is an accounting measure that can be used by firms located in the United Kingdom to more efficiently measure wealth creation as opposed to other traditional measurements, and thus, value added is influenced by a company?s work environment and aspects of its operations (Greenhalgh, 2002). The strategic importance of value added lies in its focus on the wealth created by a firm rather than on its direct sales (Peterson, 2008). This focus facilitates questions such as how much wealth is created, whether the company is increasing the wealth that it creates year by year, and how efficiently it is creating wealth (Marsh, 2003). Value added takes into account a company?s work environment and aspects of its operations such as Research and Development, Capital, Inventory, and other factors, it can be viewed as a more comprehensive measurement of the financial well-being of a firm (Greenhalgh, 2002). By comparing the relationships of value added figures for top firms, we can determine if maximizing value added is the best way to improve these key independent variables. A fundamental problem with regards to value added is that firms currently do not pay attention to better measures of company performance (Mayhew-Smith, 2006). Investors have had a hard time assessing how well companies turn the skills of their employees into goods and services (Marsh, 2003). In a rapidly-changing global economy, there is constantly a need for improved methods of analyzing a company?s wealth and economic contribution. Global marketing of products and services is currently such that competitors from developing countries have lower labor costs and can thus offer lower prices for standard products while still making enough value added to cover more than their essential internal costs. An alternative for developed countries is to provide goods and services with lower labor content and provide real value that customers want and are prepared to pay for. The value added in this case must be substantially higher than the costs of the labor and equipment so that a surplus is available for return on investment. Much of a firm?s value added is obtained by re-investing in high levels of R&D, design, brand development, and market development that are needed to sustain a high and growing level of value added (Pearson, 2008). Thus, Value Added is a performance measurement that should be studied in greater detail (Mayhew-Smith, 2006). This research project will compare value added, as a performance measure, to other variables that affect company profitability; theorizing that companies with a higher value added are more efficient, and therefore have more favorable figures in these categories. Exploration of this topic is necessary because value added is a relatively new measure of wealth, and as such, has been subject to criticism as an alternative to more traditional measures of wealth (Pearson, 2008). The significance of this research contributes to an even more significant topic because of its potential to affect value chains and business processes throughout the world. Research findings could shift executive focus from traditional profit-making to investment in value creation. If progress is to be made regarding value added as a reliable measure, however, research first needs to be done that focuses not only on comparing it to traditional accounting measures such as net income, but also the effects value added on other key measures of productivity. Firms in the United Kingdom should be studied first, due to their emphasis and success with value added. The primary objective of this study is to examine the fundamental research question of whether there is a relationship between Value added and key variables of firms? wealth and well-being for firms in the United Kingdom. The key independent variables are R & D intensity, capital intensity, return on sales, inventory turnover, firm size (measured by the natural log of total assets), and productivity (measured by sales per employee), due to their high relevance as measures of wealth creation and productivity.