Budgeting for research and development: A dynamic financial simulation approach

Budgeting for research and development: A dynamic financial simulation approach

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Article ID: iaor20032169
Country: Netherlands
Volume: 37
Issue: 1
Start Page Number: 15
End Page Number: 27
Publication Date: Mar 2003
Journal: Socio-Economic Planning Sciences
Authors: , ,
Keywords: artificial intelligence: decision support, research
Abstract:

The research and development (R&D) budgeting decision is crucial for at least two reasons: if too much is spent, short-term financial stability is at risk, while, if the budget is too small, long-term competitiveness is threatened. Nevertheless, many enterprises simply extrapolate the past without further reflection. This paper presents a computer-based dynamic stochastic simulation model that allows one to assess the impact of alternative R&D budgeting policies on corporate development. The core decisions to be evaluated concern timing and funding of investments in R&D. Our approach substantially expands earlier work by Brockhoff. In particular, it distinguishes between product and process innovation, considers market dynamics related to technical progress via a modifiable S-curve, integrates marketing, and takes into account essential financial aspects. As a result, our model is closer to reality than previous ones. A sample application with real company data illustrates its potential usage.

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