Paul Romer won the 2018 Nobel Economics Prize for integrating technological innovation into macroeconomic analysis and showing that research and development (R&D) investments are becoming essential to a nation’s progress. However, accounting textbooks, academic literature, national budget plans, and management books continue to consider R&D as a discretionary expense, defined as cost that is not tied to operations and can be curtailed or even eliminated in the short run without impacting current revenues. Even the IRS tax code’s tax credits for R&D expenditures are based on the idea that R&D is a non-essential expenditure and managers would avoid those investments without fiscal incentives.
It’s Time to Stop Treating R&D as a Discretionary Expenditure
Accounting textbooks, academic literature, national budget plans, and management books continue to consider R&D as a discretionary expense, defined as cost that is not tied to operations and can be curtailed or even eliminated in the short run without impacting current revenues. Even the IRS tax code’s tax credits for R&D expenditures are based on the idea that R&D is a non-essential expenditure and managers would avoid those investments without fiscal incentives. We question the idea that R&D is a discretionary expense, at least for digital firms. Our research suggests that a significant component of digital companies’ R&D costs are necessary operating expenses whose curtailment might stop the companies’ operations. We therefore recommend that the notion of R&D as a discretionary expense must be revisited as ideas, strategy, software, algorithms, and innovation become the foundations of economic activity.