Investing in Research and Development (R&D) is an important strategic decision for a firm. It is intended to develop distinct competencies that the firm can then leverage for sustained competitive advantage and superior financial performance. However, despite a great deal of empirical research, we still lack conclusive evidence on the degree to which R&D spending affects a firm's profits. Perhaps the only conclusion that can be drawn from this stream of research is that rates of return to R&D investments depend on a complex set of interactive relationships between industry and firm variables. This makes it exceedingly difficult to draw any general conclusions about the direct effects of R&D spending on firm profits.
This study develops and tests propositions relating characteristics of the technology context of an industry to the returns on R&D investments made by a business unit. We define an industry's technological context by its complexity, specificity, and targetedness. An industry's technology context is more complex when it supports the use of a larger number of equally valuable resources to develop and produce its produce its products and services. Complexity is also determined by the interdependence between these resources- greater.
Further, we suggest that characteristics of the tangible resources (materials, labor and capital equipment) that competing business units employ can provide useful insights into the nature of the innovation opportunities associated with and industry. In particular, we argue that complexity, specificity and targetedness of an industry. In particular, we argue that complexity, specificity and targetedness of an industry's resource pool determine the heterogeneity of technological knowledge that competitors use to develop products and services for that industry. The more heterogeneous this knowledge, the more chances a business unit has to profit from its R&D investments, leading to the following hypotheses.
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