
The Death of Corporate Research Labs - banjo_milkman
https://blog.dshr.org/2020/05/the-death-of-corporate-research-labs.html?m=1
======
jillesvangurp
I worked at Nokia Research Center for a while when it was still market leader
making smart phones. My observation is that most companies that have a
research center also have some level of disconnect between their main business
and their research branches. The two just operate on different time lines.

More worryingly and problematic is that there is also a notion of "not
invented here" where business units have very little patience for things
coming out of research units because they weren't involved. It's petty and
stupid and in Nokia's case a large part of the reason why Apple and Google ate
its lunch. It's not that they did not have competing technology but that they
didn't know what to do with it.

Corporate R&D works best when corporate leadership has some level of affinity
with it. Elon Musk is a great example of a true R&D minded leader. All his
companies are basically are R&D labs that happen to produce insanely valuable
products as a side effect. It takes a certain type of leadership to funnel
billions to the right projects and then turn them into successful products. It
requires something most business leaders simply don't have: a clue. Elon Musk
for all his flaws understands technology deeply. Most of his contemporaries in
the car industry are clueless bean counters that know little more about cars
than the number of wheels they are typically equipped with. I bet pretty much
all of them had R&D labs 20 years ago working on exactly the kind of things
that Tesla brought to market successfully. They just bungled turning that into
product because of a lack of vision & technical leadership.

~~~
simonh
I remember reading in the early iPhone days that Apple recognised virtually no
spending on R&D. That wasn’t because they didn’t do research or develop new
products, it’s that they simply didn’t see that as separate from their normal
day to day operations. I think that’s the same attitude as You’re describing
with Elon Musk. It’s all R&D all the time. That’s just how products are
developed.

Now it’s different at Apple in that they do recognise a lot if spending on R&D
but I think that’s for tax reasons.

~~~
jillesvangurp
Exactly, Steve Jobs would involve himself deeply with product development and
be in the loop on a lot of product detail.

What you don't get to see with Apple is all the stuff they don't launch or
that lingers on some shelf for years and years. They only talk openly about
stuff that they are ready to show and productize giving the false impression
that these things just popped into existence.

By the time the iphone shipped, they'd been working on it in some form or
another for over half a decade or so. Giving people enough room to do stuff
like that with an open ended agenda and strategy is exactly how you move
forward as a company. The value of people like Steve Jobs and Elon Musk is
recognizing the strategic value of efforts like this in an early stage and
then making sure it happens. That requires being clued in enough to recognize
the strategic value and focused enough to then make it happen. If you look at
the timing, this was shortly after they launched OS X and apparently went
"what else can we do with this?" (IOS is based on the same architecture).

Corporate R&D labs are where this stuff gets parked by companies that are too
impatient to wait for that. That's exactly what happened in Nokia.

~~~
fock
interestingly, before shareholder-value primate reaching the last exec, the
companies with big research units were economic and innovative powerhouses.
E.g. think of the Olivetti corporation (which sadly died after it's leading
personel exited.)

~~~
eru
Shareholder value capitalism was only ever an aspiration.

In practice companies have always been run for the benefit of corporate
insiders. Not the widows and orphans who might own a few stocks.

------
dnautics
Maybe it's more fruitful to not just consider the Death of Corporate Research
Labs, but also ask ourselves "why did they even exist in the first place?"
This day in age, the _expectation_ , for better or worse, is that the State
sponsors research; this was very much not the case from, say 1850-1950.
Luminaries did tons of basic science research under the auspices of corporate
(like Irving Langmuir) and private (like Peter Mitchell) labs.

Without assigning causality (I happen to think that the primary cause is "low
hanging fruit" phenomenon), the transition to state sponsored research has
coincided with a general loss of scientific productivity in many fields, and
even in some fields with explosive growth, like genomics, there has been major
corporate involvement (half the human genome was sequenced by a not just
private, but a wall-street traded, entity).

Yet the narrative of late has been "if the state doesn't sponsor it, nobody
will". I don't feel like I have a solid understanding of why corporate
research labs were a thing, or even, how science got done in the pre-
manhattan-project/Vannevar Bush era.

~~~
TheOtherHobbes
_None_ of the bedrock game-changer research from that period - EM theory,
thermodynamics, radioactivity, QM, relativity, the original discovery of DNA -
was funded by corporations.

Commercial research was responsible for conceptual refinements of existing
insights, and for innovations developed as industrial and consumer
applications, but not for the original intellectual breakthroughs that made
specific classes of inventions and devices _thinkable._

Computing itself was state-sponsored - first with Turing+Church's theoretical
work, then with various practical implementations whose develop was
accelerated by WWII, then with state subsidies and grants for further military
and industrial development.

Recently state funding has become less and less effective because of the
financialisation of academia. Universities now have explicit financial goals
and lean heavily on the grant funding game.

Previously the culture was far more tolerant of blue sky inquiry that might
not have an immediate payoff - or any payoff at all.

~~~
Beldin
> _None of the bedrock game-changer research from that period - EM theory,
> thermodynamics, radioactivity, QM, relativity, the original discovery of DNA
> - was funded by corporations._

Ever heard of the Solvay conferences?

While not embedded in one company, these confs were definitely sponsored by an
industrial. And strongly impactex 20th century advancements in physics.

[https://en.m.wikipedia.org/wiki/Solvay_Conference](https://en.m.wikipedia.org/wiki/Solvay_Conference)

~~~
eru
Or look at the history of the chemical and pharmaceutical industry in Germany.

------
linguae
As a (non-PhD) researcher who works for one of the last traditional industrial
research labs in Silicon Valley, I've noticed this trend for years. I've seen
industrial research labs either close or become increasingly focused on short-
term engineering goals. I also have noticed that newer Silicon Valley
companies have adopted what Google calls a "hybrid approach"
([https://research.google/pubs/pub38149/](https://research.google/pubs/pub38149/))
where there are no divisions between research groups and product groups, and
where researchers are expected to write production-quality code. I've noticed
many of my PhD-holding peers taking software engineering positions when they
finish their PhD programs, and I also noticed more people who were formerly
employed as researchers at places like IBM Almaden and HP Labs switch to
software engineering positions at FAANG or unicorn companies.

Unfortunately, as someone who is also working toward finishing a PhD, I've
seen very little guides for CS PhD students that reflect this reality. To be
honest, I love research and I'd love to stay a researcher throughout my
career, but I don't have the same love for software engineering, though I am
comfortable coding. Unfortunately with these trends, traditional research is
now largely confined to academia, which is very competitive to enter and where
COVID-19's effects on its future are uncertain at this time, and federal
laboratories such as Los Alamos and Lawrence Livermore. I fear losing my job
(nothing lasts forever) and having to grind LeetCode since there are few other
industrial research labs, though given the reality maybe I should start
grinding LeetCode anyway.

~~~
als0
I know a (non-PhD) researcher who moved on after one of those labs closed and
sadly he finds it impossible to get a research job again. Academia is his only
option but he'll have to earn a PhD before getting such a job...

~~~
linguae
It’s a tough situation, especially for non-PhD holders. Even with a PhD it’s
possible for a researcher to enter a rough patch where a career change looks
inevitable. The last time I was unemployed I started sending out my résumé to
various community colleges and universities to enter their part-time/adjunct
lecturer pools (I have a masters), but unfortunately my lay-off period didn’t
match well with the academic hiring period. I managed to get a few interviews
for software engineering positions, but the algorithms-based interviewing bar
is very high these days for a software engineering job, and admittedly my
software engineering chops degraded due to spending years in research.
Ultimately I ended up finding an AI residency program at a research lab, which
is how I ended up at my current position, but it required switching research
areas and taking a minor salary drop.

------
mobilefriendly
It is pretty strange to blame the "more relaxed antitrust environment in the
1980s" when it was the 1982 anti-trust breakup of Ma Bell that destroyed Bell
Labs and ended the monopoly profit flows that subsidized the telecom labs.

~~~
Merrill
The Bell System, IBM and Xerox, which all had corporate research labs were all
monopolies in effect - the Bell System by regulation and the '56 Consent
Decree, IBM by overwhelming market dominance, and Xerox by patent protections.
This gave all three corporations excess monopoly profits, some of which could
be devoted to research. Although the antitrust suit against IBM was settled,
it did modify IBM's behavior and it ultimately failed to compete well with
mini and microcomputer companies. In Xerox case, the expiration of patents
allowed competitors into the market.

Without a monopoly a corporation will find it very difficult to justify
research that can be used by other businesses.

The transistor was a disaster for the Bell System. It was not particularly
useful in the telephony system of the day, which used high voltages in tube
transmission equipment and high, intermittent currents in electromagnetic
switching equipment. On the other hand, the 1956 Consent Decree forced the
Bell System out of other businesses (audio, computer, consumer electronics,
etc.) and out of other countries (Canada, Caribbean). So the Bell System could
not use it's new transistor to expand in the businesses where it fit, and
having a fundamental patent on it exposed the Bell System to great anti-trust
scrutiny and greater regulatory duress, such as the FCC Computer Inquiries.

~~~
yborg
>having a fundamental patent on it exposed the Bell System to great anti-trust
scrutiny

I don't understand how this follows, having fundamental patents should lead to
the breakup of basically every large US company by the government by this
logic.

AT&T licensed the transistor to a number of companies, so even if the Bell
system didn't have a use for the device (it did in fact, in order to reduce
the size of telephone exchanges) so they derived revenue from the invention.
How this translates into a 'disaster' for the Bell System is unclear since it
was eventually broken up because of the decision that long distance and local
service should be different markets long after the patent on the transistor
had expired.

~~~
SpicyLemonZest
The argument is that, if I invent the Telephone 2.0, I can pretty confidently
predict I won't be allowed to capture so much of the profit from it. This
provides an incentive for companies to shift their R&D spending towards
product development rather than foundational research.

~~~
scarface74
If you invent anything related to cell phone standards and it gets adopted by
whatever committee sets the standard, you can become a part of the patent
pool, agree to license under FRAND and make money from your research.

------
IfOnlyYouKnew
Corporations still do invest large sums of money into long-term projects: most
acquisitions as well as buildings are amortised over a decade or so, which is
about the time-frame I would expect research to have, on average. Airplane and
car development also comes to mind.

So I believe the complaint about "short-termism" has become a bit too popular.
It's great to prop up your bona-fides as a cynic. It's less good at explaining
actual behaviour.

Instead, I believe research has simply become less profitable over time. The
decades from about 1920 into the 1980 were a time of extraordinary rapid
successes in the hard sciences: the scientific method had been established,
and industry, finance, law, transport, and communications all made sudden
jumps into modernity, allowing scientific institutions as we know them today
to exist.

If you read about the history of physics, for example, you'll see photos of
the entire class of 192x at some German university, and every single person on
the photo later won a Nobel or had at least some minor unit named after them.

We have continued to improve institutions, infrastructure, and our ability to
broaden the chance to get into the sciences. But, unfortunately, it's almost a
rule of nature that progress slows over time. That's sort-of soothing,
actually, because it means we aren't entirely incapable of prioritising easier
thing.

Government-sponsored research can continue at higher prices. But private, for-
profit endeavours have a very specific point where expected returns turn
negative.

~~~
foobarian
This 1000%. In the 40s, you invested a bunch of money into a research lab and
you got the transistor. If only that kind of payoff could still happen today.

~~~
nopeNopeNooope
I don't get this complaint? The leverage for R&D is vastly higher now than
ever before: You leave Zuckerberg in his dorm room and you get Facebook. You
leave Larry and Sergey in a garage and you get Google. You leave Steve Jobs
and Jony Ives together and you get dozens of products in Apple.

The money in vs money out in research has never been more absurdly positive in
human history.

This is why companies aren't investing in R&D, because they don't need to do
as much as they used to, because a little goes a lot farther.

~~~
knolax
None of those are breakthrough discoveries, hell most of those arguably
weren't even the first to market. MySpace existed before Facebook, Search
Engines existed before Google, Phones in Japan were just as advanced as the
first iPhone.

------
CharlesMerriam2
This type of article comes up from time to time, and is generally wrong on
many points.

* Corporate Labs are not for primary research, at least in the United States. In the U.S., any primary research is done at universities, developed from research to prototype and patent at NASA, and then licensed to a U.S. company to go to product. For non-primary research, prototypes are developed by corporations via grants from government agencies.

* Bell Labs, before AT&T monopoloy breakup, was a special business case. Its funding existed in a game of legislation maneuvering. It is not an exemplar.

* Think of labs as "tier 5 tech support, when the engineers are stumped".

Most labs are holding areas for smart people to solve sudden business
problems. For those who read the famous analysis of criticality accidents in
non-military settings, you need some smart folk hanging around to prevent
disasters.

For example, Sun Labs had people working (forever) on some hopeful
breakthrough. Howard Davidson, a failure engineer, was pulled off task when
server boxes started breaking (paper washers being glued in manufacturing) or
card connections started failing (silver substituted for gold). These were
high impact problems not solvable by line engineers.

Similarly Ricoh Labs had a day when everyone was pulled off to disassemble a
large machine and figure out a feeding problem that had a hard solution. Intel
keeps materials PhDs in the fab areas just in case something comes up that
would slow throughput.

* Many labs have reputations no longer deserved. I worked at PARC and found some teams made magic and others made bloat. Look at the short term results, meaning the past decade, to rate a lab.

------
akbirkhan
I'm really confused. When looking at artificial intelligence it seems that
actually we have dominating corporate labs which through integrated services
(such as compute and data), totally dominate academia.

It's coming to the point where researchers that want to make a difference are
actively choosing corporate research labs over academic ones.

~~~
chrisseaton
> I'm really confused. When looking at artificial intelligence it seems that
> actually we have dominating corporate labs which through integrated services
> (such as compute and data), totally dominate academia.

But this is just one unique case - where access to a lot of data and a lot of
compute makes a huge difference.

I'm not sure that it translates to many other fields in CS.

~~~
jlangemeier
Corporate research is still going to somewhat be at the whimsy of what's
bleeding edge AND has some applicable value; the idea of it just is a little
different with things like the 10% or 20% "constructive free-time" model. Each
engineer in FAANG-like companies just get a 10-20% salary allotment instead of
the equivalent expense of researcher headcount. The idea of "constructive free
time" for work is just the "agile" iteration of the research lab.

~~~
uxp100
Except “constructive free time” mostly isn’t a thing anymore, right?

~~~
eru
You can still get 20% time at Google. But you have to take it. They don't
shove it in your face.

------
aborsy
Research is very hard and has low financial rewards. If it’s funded by state,
it’s poorly paid (think of grad students, postdocs, APs). If it’s funded by
corporate, it’s basically tedious product design and it’s not interesting
science or even proper research anymore. In industry, it’s typically done by
second class citizens. Long term research is worse.

We have the classical problem of creating value vs capturing the value.

I believe that’s a major factor. I often meet students and the vast majority
want good paying 9-5 jobs and don’t want to bother with research or academic
papers.

------
mensetmanusman
“ Large corporate labs, however, are unlikely to regain the importance they
once enjoyed. Research in corporations is difficult to manage profitably. “

The easy fix is to classify the work as a net positive for a community, and
provide tax incentives such that it becomes by definition profitable, since
society can cost-in the scenario where the lab doesn’t exist.

~~~
IfOnlyYouKnew
Research can obviously be deducted from profits for tax purposes already, just
like most other business expenses.

Beyond that, it it's quite hard to set up a system where the incentives still
motivate good research. It may also just make more sense for governments to
spent the money on university research or institutions like the Max Planck
Society, rather than giving it to companies where the public gets less of a
say in its use, and any profits are privatized.

~~~
mensetmanusman
Govt. tried that during WW2, it found that nothing got commercialized because
you need a business structure surrounding the research.

------
zerop
I would attribute it to recent culture of ROI grown in high leadership of the
company. They don't understand patience, values, human relationships and
necessary soft skills to realise that Innovation and research are vital health
of the company. Problem is they are all fast thinkers and great presenters and
that's what js valued nowadays in orgs. The innovators and researchers can't
sustain in this environment. The leadership wants ROI from everything, even
research. That's not going to create a good culture and innovation wouldn't
grow.

------
mjfl
This article argues what I believe is the opposite of the truth: that
corporate research productivity is correlated with anti trust enforcement. I
think this is very wrong! Bell labs really fell apart AFTER AT&T was broken
up. Xerox parc declined AFTER Xerox was ruled a monopoly. Anti trust
enforcement KILLED innovation, and I think it’s really important that we get
the correct relationship here.

------
timkam
What worsens the problem is that publicly funded research often solves toy
application problems (at least in CS); academics know that they need to
"apply" their research to get funding/citations/publications with relatively
little effort, but from an industry/real-world perspective, many application
scenarios hardly make sense and are hand-wavy-ly evaluated (for example, in
applications of CS, too often the code is not shared so that the results are
practically not reproducible). The current system simply rewards researchers
who manage to get into the top venues with the least effort possible, and for
many who aren't brilliant the pseudo-application approach is the way to go.
IMHO, this broadens the gap between academia and industry, because it's hard
for a practitioner to pick out the few relevant nuggets in a stream of half-
baked applied research.

------
f00zz
This sounds a bit hyperbolic when you have Microsoft doing pie-in-the-sky
research on topological quantum computing, Google and IBM research teams
arguing over quantum supremacy, etc.

------
Balgair
Good overview!

I work in a corporate research lab. We're not big (market cap ~25B) but there
is a real thirst for innovations.

I'll echo the point about Research v Development. We're much more heavy on the
development side of things, with time horizons of ~3.5 years. Research is ~10
years. Our research department is just me and 4 other guys. Our development
department is _much_ larger.

One thing I found different is in M&A. We've purposefully _not_ done a lot of
M&As. Mostly because the bureaucracy is so thick here. Monopolizing the time
of the smaller companies is simpler and faster than trying to onboard them. I
suspect there are healthcare issues involved too.

It'll be interesting to see how long things last.

------
gauravsc
I'm not sure how true that is for sectors other than software/AI, but in AI
most academic researcher complain that all the moonshot research (often not
even commercially applicable) is now solely coming from corporate research
labs e.g. Deepmind, Facebook etc., as opposed to universities. They attribute
this to poaching of faculty by companies, lack of resources in universities,
lack of motivation in grad students to stay in academia.

------
Razengan
There should be [more] publicly-funded, non-profit organizations that do
research for research's sake, whose fruits are made available to all.

To avoid the problem of controversial projects causing some funding sources to
pull their support, there could be mechanisms for funding individual projects.

And to avoid the risk of reappropriation by a government or military, they
could be hosted in the EU. :)

------
ChrisLomont
As of 2016 corporate R&D was at a record high.

[https://www.aip.org/fyi/2016/us-rd-spending-all-time-high-
fe...](https://www.aip.org/fyi/2016/us-rd-spending-all-time-high-federal-
share-reaches-record-low)

~~~
seanmcdirmid
R&D measures often include a lot more D than R.

~~~
ChrisLomont
Do you claim this was not the case when R&D spending was demonstrably lower? I
see no evidence demonstrating that when I looked for it.

~~~
seanmcdirmid
I'm claiming that the R part of R&D was always tiny to begin with. That rising
spending R&D is not indicative of much more R compared to dedicated research
labs.

~~~
ChrisLomont
>That rising spending R&D is not indicative of much more R compared to
dedicated research labs.

R&D are not binary options.

I know in some fields a massive amount of published papers are coming from
corporations, and I suspect if I could find data on it that the percentage of
peer-reviewed publications from corporations is much higher than in the past.

Certainly in various CS and math disciplines I work with, corporations have
made massive inroads.

You're trying hard to push at a possible loophole in the rise in spending, but
without evidence that more spending was not spent on what you think it should
be, it's sensible to assume it was actually spent on increased R _AND_ D.

Otherwise, for every conjecture you can make without evidence, I can just as
easily make the opposite conjecture, and neither has been demonstrated.

Take a few moments and try to source some good evidence - I looked at a few
directions and didn't find anything one way or the other, except that spending
has increased.

------
mark_l_watson
I worked at SAIC back when it was a small company (and before changing the
name to Leidos). I will forever be grateful for being able to work about 25%
of my time on IR&D, all of my own choosing. I think the US government allowed
us about 1% or 2% of our gross to be reimbursed R&D - I forget the details.

At my last job before retiring (Capital One, a great company to work for BTW)
my team had a huge amount of autonomy on what we worked on, but my team was
awesome.

I don’t really understand the relative merits of many small R&D projects vs.
huge infrastructure. Perhaps the industry is just moving to a many small
projects approach?

------
TheGrassyKnoll
Well, corporate research money may be drying up, so now the public is being
asked to fund it (at least in California). There's a $5.5 billion bond
initiative (Proposition 14) on the ballot for 2020. This is similar to
proposition 71 which was passed in 2004 for $3 billion, "The California Stem
Cell Research and Cures Act”.

    
    
      California Proposition 14, the Stem Cell Research Institute Bond Initiative, 
      https://ballotpedia.org/California_Proposition_14,_Stem_Cell_Research_Institute_Bond_Initiative_(2020)

------
usrusr
Trouble starts with the term R&D which names two separate things that rarely
go together (I think PARC was somewhat close to doing both). A company
research lab would be decidedly not development or it's not a research lab.
The best way to run a company research lab is to run it as a marketing tool,
like a slightly more on-topic way of sponsoring a sports team. IBM seems to do
it that way, at least whenever a bluishly named supercomputer is ruining yet
another human game. I wonder if they are aware of that analogy.

------
LatteLazy
Research has (correctly) been outsourced. If you have a good idea, go prove it
and then you can sell it to Acme for $100m. That's a much better deal for Acme
because they only need to buy things that work. And it's a much better deal
for you (you get $100m to share with your investors instead of a $10 dollar
voucher [0] for a $100m idea).

[0]:
[https://en.wikipedia.org/wiki/Tracy_Hall](https://en.wikipedia.org/wiki/Tracy_Hall)

------
ylem
I remember an interesting article (I can't find the reference) that made the
claim that for a number of pharma labs, the advantage in hiring researchers is
not that they are likely to make a great discovery--but rather that they will
be up to date with the literature and be able to recognize a potentially great
discovery and to productize it. This is not necessarily trivial as a number of
things that work in an academic lab setting don't translate into actual usable
drugs.

------
fallingfrog
This is part of a larger pattern where we are not investing in anything
anymore that doesn’t bring immediate returns to some investor; not basic
research as in the article, not public infrastructure, not planning for things
like climate change. It’s all about immediate gratification, fast returns.
Kicking the can on every problem and avoiding any unpleasant decisions or long
term investments.

------
TabTwo
Looking out of my office window in Stuttgart I can see the big sign „Nokia
Bell Labs“. You can almost smell all the history this sign carries

------
Sniffnoy
Non-mobile link: [https://blog.dshr.org/2020/05/the-death-of-corporate-
researc...](https://blog.dshr.org/2020/05/the-death-of-corporate-research-
labs.html)

------
amelius
Big pharma still has research labs. Or else, where do all their patents come
from?

~~~
refurb
Indeed. Biopharma has some of the highest spend on R&D as a percentage of
revenue of any industry sector.[1]

However, keep in mind a big part of that is development, not research. It's
still science and not guaranteed to work, but it's more focused on the
development needed to bring a product to market versus doing science to make
new discoveries.

[1][https://www.statista.com/statistics/270233/percentage-of-
glo...](https://www.statista.com/statistics/270233/percentage-of-global-rundd-
spending-by-industry)

------
jrochkind1
Interesting, after the Bell Labs example, I was going to guess that anti-trust
enforcement meant that companies weren't big enough to afford an internal lab
anymore.

But the OP, quoting/citing Arora et al, actually suggests the REVERSE
causative correlation:

> Historically, many large labs were set up partly because antitrust pressures
> constrained large firms’ ability to grow through mergers and acquisitions.
> In the 1930s, if a leading firm wanted to grow, it needed to develop new
> markets. With growth through mergers and acquisitions constrained by anti-
> trust pressures, and with little on offer from universities and independent
> inventors, it often had no choice but to invest in internal R&D.

And that in fact later "lack of anti-trust enforcement... killed the labs".

Makes sense to me. Goes to show that our "intuition" (of course informed by
cultural assumptions) for how capitalism works and it's effects isn't
necessarily accurate.

------
kratom_sandwich
Previous discussion:
[https://news.ycombinator.com/item?id=23246672](https://news.ycombinator.com/item?id=23246672)

------
the-dude
Previously :
[https://news.ycombinator.com/item?id=23246672](https://news.ycombinator.com/item?id=23246672)

------
valenciarose
Under-taxation of corporations plays a significant role in the decline of
research spending. While potential competitive advantage is one reason to
pursue research and development, taxes and the interplay between tax and
corporate accounting are another reason (even prior to 1981).

While taxes paid by corporations benefit the general public, from the
corporation’s point of view taxes are money out the door with zero possible
return. So what does a prudent corporation do with its profits? It recognizes
that they are potential capital and seeks to maximize the risk-adjusted return
on capital.

It can bank them at the risk-free rate of return, but we should remember taxes
will take a healthy chunk out of that return on the front end. It can pay them
out to investors as dividends (increasing the return on remaining capital by
reducing the denominator). Note that under rational tax schemes the risk
adjusted return on capital should be equivalent to investing at the risk free
rate of return (modulo management of cash-flow risks). It can buy riskier
assets with higher return, such as other companies. And it can make much
riskier investments, like research and development. As with most things
financial, the best overall risk adjusted return on capital is diverse in both
kind and in risk level. It should do all of those things (treating dividends
as equivalent to investment at the risk free rate of return), with the
proportion going to each tuned to achieve the aggregate optimum(1). Also, can
you see how a regulated utility with(like AT&T of old) would find R&D
attractive for spicing up its asset mix?

Think of R&D as producing a stream of lottery tickets with the drawing in the
distant future. Those lottery tickets (for a tech company) can pay off in two
ways. One is that they could produce or enhance a revenue stream. The other is
that they could reduce risk in the form of patents (reduce competitive risk
and risk of patent suits by threat of countersuit). Both of these payoffs
improve risk adjusted return on capital (by generating return or reducing
risk). The neat thing about R&D for a company that’s paying real taxes is that
much of the cost is (from a tax point of view) is an expense. In other words,
that allocation of capital doesn’t have the upfront bite taken out of it that
occurs when profits are directed to risk free assets. Looking at this from a
risk-adjusted return point of view, having a real tax burden increases the
appetite for risk by decreasing the relative attractiveness of the risk-free
alternative after taxes. This is doubly true for expenditures that look like
expenses to tax collectors but look like capital investment for corporate
accounting purposes.

None of this holds true if a company isn’t paying much in the way of taxes on
its profits. It doesn’t mean some amount of R&D isn’t still attractive, but
the appetite for risk is lower. And let’s be clear, R&D in research labs is
the riskiest kind of R&D.

Well, you might say, the 1981 R&D tax credit is sweeter than a deduction.
Doesn’t that tilt the scales back? Yes, but subject to the limitations of the
tax credit (which are numerous). But, like the deduction, the tax credit is
much less valuable for companies that aren’t paying taxes on their profits.
And, to be clear, this is a Reagan measure taken with full knowledge of what
was expected to happen to corporate tax rates and the impact that might have
on R&D investment. It’s a partial mitigant for that, nothing more.

I am fully aware that I have murdered both CAPM and the practice of accounting
in compressing this down to a reasonable post with what I hope is a clear
narrative. My apologies to practitioners of both.

(1) An important aside: People make equity investments to take more risk in
the expectation of higher return. Beyond the cash cushion necessary for
minimizing cash-flow risk, massive cash hoards do nothing but dilute the risk
(and return) rational investors are actively seeking to take. There is some
argument to be made that large tech companies keep huge cash hoards because
their core businesses are riskier than they appear (esp black swan events),
but it probably has more to do with founders desire for independence.

------
totesraunch
This is Capitalism. Let the government and educational institutions spend all
of the money, do the real work and research, and then as a private company
swoop in and reap all of the benefits.

A blatant example would be Gilead Truvada for PrEP. US Tax payer funded
research and all profits go straight to Gilead.

~~~
refurb
_A blatant example would be Gilead Truvada for PrEP. US Tax payer funded
research and all profits go straight to Gilead._

That's such a gross oversimplification to the point it's just wrong. If you
want to read how one of the two drugs in the combo was developed, I'd suggest
this journal article [1] - I warn you, the story evolves over 15 years.

The initial discovery of the class of compounds was done at Emory university.
Emory then partnered with Burroughs Wellcome. Burroughs Wellcome was then
acquired by Glaxo, who halted the research. The rights then went back to
Emory, who then spun it out to a start-up called Triangle Pharmaceuticals, who
was then acquired by Gilead who brought Truvada to market.

Emory did sue a number of manufactures as they had a patent, but it was
settled with a fat ($525M) cash payment to Emory and an on-going royalty
stream.

[1][https://www.ncbi.nlm.nih.gov/pmc/articles/PMC5777139/](https://www.ncbi.nlm.nih.gov/pmc/articles/PMC5777139/)

