The combined cost of government programs for Covid-19 has pushed U.S. federal debt to 102% of GDP, the highest level since World War II. In order to afford the new debt without dramatically decreasing spending or increasing taxes, we need substantial economic growth. The primary path to this is innovation, which from 1990-1995 accounted for an estimated 60% of growth — and 70% of that innovation was funded by companies. As such, company-driven innovation is likely going to play a huge role in the recovery.
When Activist Investors Should Slash R&D — and When They Shouldn’t
In order to reduce the debt levels imposed by Covid-19, governments will need their country’s economies to grow. Corporate innovation is the major source of economic growth. Unfortunately, companies are generally wasteful in R&D spending, according to a measure called RQ, which allows you to assess the profits generated for the last dollar of R&D. The evidence suggests that activist investors are good at figuring out when companies are wasteful with their R&D budgets but their fixes are oriented to cutting expenses and speeding up project completion in order to deliver immediate stock price performance and do not deliver more innovation in the long run. By studying RQ at the unit level and over time, companies can identify internal benchmarks to improve their overall R&D efficiency and even identify external practices to adopt.