CHAPTER ONE
INTRODUCTION
1.1 Background to the Study
During the last few decades the intensity of corporate Research and Development (from this point R & D) has increased significantly (Pandit, Wasley, & Zach, 2011). Companies have become more motivated to carry out R & D as a result of exposure to competition as well as the fact that most of the world`s economies have embarked policies reforms on market-oriented liberalization aimed at promoting economic performance (Salim & Bloch, 2009). In theory, the International Accounting Standard (IAS) issued by the International Accounting Standards Board (IASB) defines research as an “original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding”. The standard also defines development as “the application of research findings or other knowledge to a plan or design for the production of new or substantially improved materials, devices, products, processes, systems or services before the start of commercial production or use” (IASB, 2012).
As a result, R & D has been regarded as a significant factor in enhancing the specialization patterns of a company’s competitive advantage internationally, helps in the maintenance or improvement of existing products, creation of new products and innovation of the production processes of companies thereby improving firm´s performance (Salim & Bloch, 2009).In addition, R & D is also aimed at polishing the professional know-how associated with the manufacturing and production processes of companies, covering issues such as basic research, product design, manufacturing processes and service procedures (Shu-Ching & Wenching, 2006). Therefore, an increase in a company`s R & D will help modernize the production of tradable goods, rendering them appealing to catch the attention of domestic buyers away from imports as well as to catch the attention of foreign buyers, thus increasing exports (Salim & Bloch, 2009).
Moreover, R & D is also known as innovation cost because it is the cost of discovering new knowledge concerning the manufacturing processes of a company, its products and its services. The knowledge discovered when applied is instrumental for the creation of new or improved products and services that are important in fulfilling the needs and wants of the market (Khazabi, 2008). Therefore, R & D has a significant role to play on economic growth, economic welfare (Grabowski & Vernon, 2000), firm´s performance as well as a major factor that is used in determining the competitiveness of firms and economies (Salim & Bloch, 2009). Thus, both publicly supported and privately funded R & D will bring into being ideas and information about new products or components, new ways on how to arrange or utilize them as well as new ways on how to properly design new goods or services for producers to meet the potential wants and needs of consumers satisfactorily (Griliches, 1992).
On the other hand, firm´s performance is generally measured using accounting-based indicators and these indicators have been regarded as the most important criterion for evaluating the performance of firms (Sher & Yang, 2005). Among the relatively large number of accounting-based indicators that are used to measure firm´s performance are: Return On Common Equity (ROCE), Return On Assets (ROA), Interest Cover (IC), Asset Turn Over (ATO), Earnings Per Share (EPS), Price Earnings Ratio (PE), Dividend Cover (DC), Dividend Yield (DY), Capital Gearing Ratio (CGR) and so on (Wood & Sangster, 2002). Moreover, profit is generally used to form the foundation for measuring firm´s performance or the basis on which accounting-based indicators are measured (IASB, 2012). In addition, several other prior researchers have used accounting- 2 based indicators to measure firm´s performance such as Lev, Sarath, & Sougiannis (2005), Sher & Yang (2005) and Shu-Ching & Wenching (2006).
However, the benefits from R & D on firm´s performance cannot be realized in the year in which the investment took place (Blanes & Busom, 2004). Thus, any form of government support to business R & D is more likely to help improve firm´s performance if the support is programmed within a long-term framework thereby dropping to an extent some forms of uncertainty that firms might encounter (Guellec & Van Pottelsberghe de la Potterie, 2003). Consequently, R & D has continued to increase progressively within industries and management considers it as an important factor to help improve firm`s performance thereby leading the firm towards profitability. Hence, the ultimate goal of R & D is the creation of future revenue and profits (Mank & Nystrom, 2001).
Furthermore, the relationship between current R & D and firm´s performance can only be solid if management implements and utilizes better control measures of R & D expenditures within the firm (Doyle & Navratil, 1981). Therefore, the overall effect of R & D on firm´s performance will largely depend on top management ability in terms of putting in place effective and efficient control measures for managing the R & D expenses. Hence, the total profitability that a firm should earn from a successful R & D program should be greater than the total R & D expenditures, if not, then it would be better if the R & D program is closed off (Doyle & Navratil, 1981) or reviewed. Nevertheless, from the standpoint of accounting theory, R & D expenditures that are incurred and are expected to benefit future accounting periods should not be written off against the revenues of the current accounting period (Bierman Jr & Dukes, 1975). As a result, one school of thought argues that R & D should be treated as intangibles assets by capitalizing them before subsequent amortization in order to expense it across other accounting periods (Green, Stark, & Thomas, 1996).
Moreover, the main incentive for immediate expensing of R&D occurs when reliable evidence of future economic benefits from current R&D activity is lacking (Kothari, Laguerre & Leone, 2002).On the other hand, the main incentive for capitalizing R&D lies on the grounds that the benefits from R & D investments are not harvested in the year in which the expenditure took place (Flamm, 1990).This therefore requires capitalizing before subsequent amortization in order to spread the cost across other accounting periods (Roberts, 1965).
Also, R & D when capitalized has been found to affect stock returns negatively and R & D when expensed was found to have a positive association with stock returns (Cazavan-Jeny & Jeanjean, 2006). In addition, another study shows that announcement of large R & D investment has a significant positive association with abnormal stock returns (Doukas & Switzer, 1992). On the other hand, a different study reveals that R & D expenditures appear to have no major effect on stock returns signifying that the stocks have been fairly priced (Anagnostopoulou, 2010; Doyle & Navratil, 1981; Nguyen, Nivoix, & Noma, 2010). Moreover, Oswald & Zarowinargue (2007) also argue that capitalization of R & D might not result in more informative stock prices (Oswald & Zarowin, 2007),thus creating some contradictions justifying more research.
Prior researches reviewed so far indicate that past empirical studies concerning R & D have focused largely on either the accounting treatment of R & D; for instance Green et al.,(1996); Bierman & Dukes (1975) or on investigating the effects of R & D on stock prices of the firm; for instance Cazavan-Jeny & Jeanjean (2006); Nguyen et al.,(2010 ). In addition, Hanel & St-Pierre (2002) and this study focused only on investigating the effect of the knowledge spillover of R & D on profitability in which the result indicates that the net effect of knowledge spillovers produced from R & D activities do not contribute to firm`s profitability (Hanel & St-Pierre, 2002). Hence, to the best of my knowledge very little or no prior empirical research has been done to investigate investment in Research and Development (R&D) and financial performance of an organization by using MTN Ghana Telecommunication as a case study, thus creating a research gap that needs to be fulfilled.
1.2 Statement of the Problem
In Nigeria, several factors have been suggested to account for not properly investing in R&D and these factors are as follows: Lack of awareness on existing R&D outcomes, lack of National Coordination of R&D activities/results thereby leading to duplication/dissipation of efforts, lack of linkages between Industry, University and Research Institutes, inadequate research funding, infrastructural problems, lack of critical mass of personnel and facilities thereby leading to weak institutional provisions, lack of enabling environment thereby leading to professional limitations of the researcher, poor patent culture thereby leading to lack of patent marketing, poor management of Intellectual Property Rights thereby leading to lack of motivation for research, weak Intellectual Property Rights (IPR) laws and enforcement, poor reward system and control, poor technological base prevalent by organizations in the country, low level of entrepreneurship, poor technology management, poor targeting of research and market orientation that have resulted in irrelevance of R&D results/inventions, poor quality assurance of local R&D results thereby making it unattractive to domestic industries, apathy of financial institutions towards commercialization of research results as it is considered a high risk venture, lack of confidence by venture capitalists thereby leading to low level of venture capital in financing commercialization, absence of a well-recognized financially strong and viable agency to promote and drive commercialization process, lack of a national policy that protects local products of R&D results and provides a strong marketing strategy, etc. Perhaps, the single most important of these factors was the absence, before 1988, of a formal institutional framework of excellence for the management of investment in R&D results emanating from the public sector and private organizations. Despite the fact that there were over fifty (50) resource based research institutions in the country, the outcomes from research activities of these institutions have not been developed to the benefit of the national economy, because the developmental aspect of R&D has not received the right attention in the national development plan.
1.3 Objectives of the Study
The main objective of this study is to investigate investment in Research and Development (R&D) and financial performance of an organization by using MTN Ghana Telecommunication as a case study. Specifically, the study also seeks:
- To examine the strategies used in research and development investments of MTN Ghana Telecommunication
- To understand the impact of investments in research and development on Return on Asset of MTN Ghana Telecommunication
- To investigate the impact of investments in Research and Development on Earnings per Share of MTN Ghana Telecommunication
1.4 Research Questions
This study aims at answering the following research questions:
- What are the strategies used in research and development investments of MTN Ghana Telecommunication?
- What is the impact of investments in research and development on Return on Asset of MTN Ghana Telecommunication?
- What is the impact of investments in Research and Development on Earnings per Share of MTN Ghana Telecommunication?
1.5 Research Hypothesis
The following hypothesis will be tested in the course of this study:
- There is a significant relationship between investments in research and development and Return on Asset of MTN Ghana Telecommunication
- There is a significant correlation between investments in Research and Development and Earnings per Share of MTN Ghana Telecommunication
1.6 Significance of the Study
A study of this nature with the title “investment in Research and Development (R&D) and financial performance of an organization of firms” aims to make significant contributions to existing literature in accounting and finance in the follows ways: First; as earlier mentioned, most prior researchers who studied R & D focused on either the accounting treatment of R & D or on investigating the effects of R & D on stock prices of the firm ,whereas this study focuses on investigating R & D as a factor of enhancing the financial performance of firms. Second, understanding the empirical relationship between R & D and firm´s financial performance is important for Board of Directors (BOD) and General Managers (GM) of firms as well as other policy makers when they have to make strategic economic policies and decisions about R & D investments.
1.7 Scope of the Study
This study aims at investigating investment in Research and Development (R&D) and financial performance of an organization by using MTN Ghana Telecommunication as a case study, therefore, the study will be carried out among the staff of the organization. The data for this study would be obtained mainly from secondary sources; particularly from the company’s financial accounts and publications.
1.8 Limitations of the Study
Finance is one of the elements that assist a good research. Financial constraint created difficulties in the process of this research work; however, it did not hinder the research. The main limitation of this study is time constraint. The time allotted for the completion of this research is not adequate based on recent and contemporary happening with respect to the impact of Research and Development (R&D) and financial performance of an organization in Ghana.
1.9 Definition of Terms
The following words are operationally defined as they would be used in this research study.
Earnings per Share: is the portion of a company's profit that is allocated to each outstanding share of its common stock. It is calculated by taking the difference between a company's net income and dividends paid for preferred stock and then dividing that figure by the average number of shares outstanding.
Return on assets: is an indicator of how profitable a company is relative to its total assets. ROA gives a manager, investor, or analyst an idea as to how efficient a company's management is at using its assets to generate earnings. Return on assets is displayed as a percentage.
Research and Development: is the process by which a company works to obtain new knowledge that it might use to create new technology, products, services, or systems that it will either use or sell. The goal most often is to add to the company's bottom line.
