What Does Return On Research Capital Mean?

Return on Research Capital (RORC) is a calculation used to assess the revenue a company brings in as a result of expenditures made on research and development (R&D) activities. Return on research capital is a component of productivity and growth since research and development is one of the ways in which companies develop new products and services for sale. This metric is commonly used in industries that rely heavily on R&D, such as the pharmaceutical industry.

Understanding Return On Research Capital (RORC)

Companies face an opportunity cost when examining the use of their funds. They can spend money on tangible assets, real estate or capital improvements, or they can invest in R&D. Investments made in research may take a number of years before tangible results are seen, and the return typically varies between industries and even within sectors of a particular industry.

In theory, if an enterprise has promising prospects, they should forgo returning capital, and plowback retained earnings into the business. Investing in research and development is one popular method to develop future innovation capabilities. Analysts and investors will monitor R&D levels in an effort to gauge future competitiveness. Recently, many industries have come under fire for shrinking R&D budgets; while stock buybacks are at all-time highs.

Research and development initiatives are very difficult to manage since the defining feature of research is that the researchers do not know in advance exactly how to accomplish any given desired result. In larger businesses, monitoring R&D spending presents a problem in itself. As a result, higher R&D spending does not guarantee more creativity, higher profits, or more market share. Thus, at times, managers struggle to prove effectively return on research capital.

Recent breakthroughs in big data, analytics and enterprise risk management methodologies are helping demonstrate with evidence-based proof: investment in research and development adds enterprise value. In business, money follows success. As business leaders further demonstrate return on research efforts, budgets will grow as well.