We make many types of investments in the future, brand building, capability development, process optimisation, building the foundations to scale, and significantly, R&D.
Each is aimed at generating future cash flow.
The management and strategic challenge is how we justify investments today in something that may or may not occur tomorrow.
In relation to R&D, we have a specific dilemma, in both private and public sectors.
Capitalising R&D is a problem, as it makes us very sensitive to the sunk cost syndrome. We have real trouble walking away from it when the outcomes are not as expected, and the experiment is clearly a failure.
R&D is experimental, most things you try will not work. When you have capitalised them, and they do not work, you have a balance sheet write-off to explain. In this situation, the propensity of humans to resist an admission of being seen as having been wrong is heightened.
Much better to expense it, then there is no sunk cost to write off, fewer egos and personal agendas to be managed, although the sunk cost syndrome is alive, powerful, and often hidden in jargon.
On the flip side, research is long term, and needs the certainty of long-term funding. It should be immune to the vagaries of the short-term profitability fix, that typically stalks expenses.
Take the marketing investment in brand building as the prime example.
Building a brand takes a long time, is incremental, and sensitive to short term fluctuations and changes in direction that can be influenced by the profitability this quarter, the demand for a discount from a significant customer, or a change in personnel. Being an expense makes investments in marketing the target for a short-term fix for a short-term problem, at the expense of the long term.
There is no right answer to the question, it always ‘depends’ on something.
For example, private enterprise typically has a much shorter time frame than government, and therefore, does less of the long-term exploratory science. By preference they take the output of publicly funded labs and apply it to problems they see in the marketplace.
Somewhat cynically, we see the time frame of government as being the election cycle. However, almost all the key discoveries in the last 75 years that I can think of have evolved in one way or another, from publicly funded science. The irony is that such funding is subject to annual budget pressure. In this country that has resulted in public science being gutted over the last few decades, which erodes the foundation of innovation.
I did not answer my own question, and it remains a key one to be considered. However, despite the recent announcements by the Albanese government, I suspect we are circling the drain.
Header photo: Monticello dam drain glory hole. USA
