A company can rationally spend less on research and development (R&D) than would benefit society as a whole: it bears the cost and risk, but may not capture every payoff. That does not prove consumer companies generally underinvest, or that more R&D automatically produces better products. The evidence on corporate short-termism is contested, and consumers experience innovation through products that work better, last longer, or give them more choice—not through an R&D budget on its own.
Why might a company invest less in R&D than society would want?
R&D is an input with uncertain returns. A project can take years, fail technically, or produce something customers do not value. Even a successful project may benefit other firms and consumers: knowledge can spread, employees can move, and one innovation can enable further ideas. If the company pays most of the cost but captures only part of the wider benefit, it may invest less than the level that maximizes total social value. The OECD identifies cost, uncertainty, time to returns, and spillovers as relevant rationales for public support of business R&D in its 2016 analysis, Government Financing of Business R&D and Innovation.
These are explanations for an incentive gap, not proof that every company or industry spends too little. The evidence summarized here spans listed firms, innovation policy, UK consumer-product innovation, and a specific competition case. It does not establish that consumer companies as a class underinvest, or identify the ideal R&D budget for any particular firm.
Risks and delayed payoffs
Near-term earnings can be easier to observe than the eventual value of a research project. Managers may face pressure to contain costs or meet near-term targets, while investors may differ in how long they are willing to wait. Financing constraints can also make uncertain projects harder to fund. These are plausible, context-dependent mechanisms; the available evidence does not rank their importance across consumer companies.
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Competition may reward different strategies
When firms compete mainly on cost, a manager may favor faster, lower-risk product development over a longer research program. A 2001 study discusses how analyst and shareholder preferences for lower-risk, shorter-term product R&D may influence time-to-market strategies when cost competition dominates. Its argument is conditional on that competitive emphasis; it does not show that the same pressure governs every market.
Does short-termism explain corporate underinvestment?
It may influence decisions in particular firms or situations, but the broad claim that companies systematically sacrifice valuable long-term investment for near-term results remains disputed.
What the aggregate evidence can—and cannot—show
The OECD’s 2021 corporate-governance analysis describes the post-2008 concern that firms favored immediate results over long-term productive investment. It finds the evidence inconclusive: one line of analysis points to increased short-termism, while critics note globally sluggish capital expenditure alongside continuing R&D growth. As the OECD cautions, aggregate investment data for listed firms cannot by themselves establish why businesses made their choices or prove whether short-termism caused them.
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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 the predictions of short-termism critics. That is a review and interpretation of evidence, not a definitive causal experiment.
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How to read the often-cited executive survey figure
Kaplan reports a 2005 survey by Graham, Harvey, and Rajgopal in which 78% of 401 financial executives reportedly said they would sacrifice long-term value to smooth earnings. This is a stated willingness concerning earnings smoothing, as reported secondhand by Kaplan; it is not a measurement of R&D cuts, nor proof that all executives behave that way. Treating it as a direct measure of corporate research investment would overstate what the statistic shows.
The distinction matters: pressure for near-term results can be real without demonstrating a general, measurable shortfall in R&D. Neither aggregate spending trends nor a survey about earnings management identifies the right investment level for a particular company.
What does R&D spending tell you about product quality?
R&D can contribute to better performance, safety, durability, energy efficiency, usability, or new product varieties. But those outcomes depend on projects succeeding, reaching production, being maintained after launch, and addressing what users need. Spending is an input—not a guarantee of quality or a direct consumer score.
Measures also differ. Companies’ definitions and accounting allocations of R&D vary. Patents are an imperfect proxy for innovation: defensive patenting may not reflect a meaningful product improvement, and some innovation is difficult to quantify. The OECD’s 2023 theoretical perspective on competition and innovation notes these measurement limits. A meaningful comparison therefore needs evidence about outputs and consumer outcomes, not just an R&D line item or patent count.
Useful evidence when comparing companies or products
There is no single standardized score in the evidence summarized here that turns R&D into a quality ranking. For a specific product market, compare evidence on:
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- Investment input: R&D amount or intensity, with the company’s definition, period, and scope made clear.
- Innovation output: launches, substantive product changes, independently measured performance, or validated technical results. Do not treat patent totals alone as a quality score.
- Consumer outcomes: category-relevant measures such as reliability, safety, durability, performance, and variety.
- Competitive conditions: entry, concentration, switching options, barriers, and credible evidence of coordination.
- Quality information: whether buyers can verify claims before purchase or need independent testing, warranties, or experience using the product.
How can competition affect innovation and consumer choice?
Competition can give firms a reason to improve products to win customers. Coordination that suppresses innovation can weaken that incentive and narrow the alternatives available. A specific example comes from the OECD’s 2023 report, The Role of Innovation in Competition Enforcement: it recounts the Korean Fair Trade Commission’s February 2023 action involving Mercedes-Benz Group, BMW, Audi, and Volkswagen. The KFTC concluded that coordination on emissions-cleaning technology restricted development and release of new diesel cars that could have achieved better gas-reduction performance, limiting innovation and consumer choice.
This is an account of a regulator’s conclusion in one automobile case, not a general estimate of the effect of competition on every consumer market. It illustrates a mechanism: where coordination removes pressure to innovate, consumers may miss out on improvements or alternatives.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.Why does information about quality matter to buyers?
Some products are experience goods: important aspects of quality become clear only after use. Others are credence goods, where buyers may not be able to assess quality even afterward. In its 2019 analysis Trust and Online Markets, the OECD explains that consumers may rely on imperfect signals such as brand names when they cannot judge quality directly.
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When buyers cannot distinguish good from poor quality, firms may have weaker incentives to improve, and prospective entrants can find it harder to persuade consumers to try an unfamiliar product. Independent testing, trustworthy reviews, warranties, and clear performance information can help buyers assess claims, although no one signal establishes that a product is best for every user.
Consumers can contribute to innovation, too
Product development is not limited to company laboratories. A 2012 study by Eric von Hippel, Jeroen P. J. de Jong, and Stephen Flowers, based on a survey of 1,173 UK adults, estimated that 6.1%—nearly 2.9 million people—had developed or modified consumer products in the previous three years. The authors also estimated that UK consumers’ annual household product-development spending was more than 1.4 times the annual consumer-product R&D spending of all UK firms.
Those figures are estimates for the study’s UK population, period, and definitions; they are not a global ratio. They show that users can create or adapt products, not that household activity replaces company R&D or guarantees wider availability of an innovation.
What should consumers take from this?
For an individual purchase, a company’s R&D spending alone is rarely enough to establish whether a product is reliable, safe, durable, or good value. Look instead for category-specific performance evidence and quality information you can evaluate. At the market level, the key questions are whether firms have incentives to improve, whether buyers can recognize improvements, and whether consumers have meaningful alternatives. Those conditions shape how research and product development may translate into better choices, but they do not make every increase in R&D spending a consumer benefit.
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