The relationship between Research and Development expenditure and the firm's market share in the UK highly innovative industries

Abstract

In spite of the widely-held focus on innovation, on the one hand, and the popularity of market share-oriented strategy, on the other, in strategic management, there is a dearth for evidence about the relationship between in-house R&D and market share. The research question is: ‘Does an increase in a firm’s R&D expenditures (relative to the industry’s total or the firm’s rivals) leads to an increase in the firm’s market share?’ It explores whether a firm could grab a larger market share at the expense of its competitors through a growth in the share of R&D expenditures in the industry. The sample of industries includes Pharmaceuticals and Biotechnology, Aerospace and Defence, Software and Computer services, Technology and Hardware equipment, Automobiles and Parts, which together account for more than a half of the UK1000 R&D activities. The methodology employs econometric estimates of production functions containing R&D variables. This research findings support the Sources of Growth theory: in short and medium terms, increasing conventional inputs such as capital, labour, human capital, and intermediate inputs increases market share of the top and middle end firms in the UK highly innovative industries. The research findings are also consistent with the ‘first-mover advantage’ theory: the lagged market share is significant and positive, showing that ‘success breeds success’, in line with Philips’ (1966) arguments. However, although according to the economic growth theory innovation leads to economic growth at a macro-level, at the level of an individual firm this may not be so obvious in short and medium terms in regards to the growth in market share of the top and middle end firms in the UK highly innovative industries. In spite of the prevailing view that a growth of market share is the primary strategic objective firms seek to achieve at any cost, the findings of this research suggest that firms do not necessarily aim their in-house R&D at increasing a market share.