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CSR sparks R&D spends

November 27, 2022

How and why companies that stepped up R&D spends to avoid CSR have done well

Corporate social responsibility regulations mandate that companies fulfilling one of three criteria — net worth, turnover or profit — must spend 2 per cent of the average net profit of preceding three years on CSR activity.

A recent study by Shubhashis Gangopadhyay and Swarnodeep Homroy of the Department of Economics, Econometrics and Finance, University of Groningen, The Netherlands, has turned in an insight: companies just under the net profit threshold have been trying to avoid CSR spending by increasing their own R&D expenditure (to depress profits).

Here again, only companies with a proclivity for spending on R&D have increased their expenditure under the head; others have opted for CSR. This is because the R&D-minded companies have already incurred the high-cost, long-term expenditure on R&D infrastructure. As such, they only had to step up R&D spends to avoid CSR. The others, in contrast, would have to start from scratch to set up research labs.

Now, the nub of the issue is that companies that stepped up R&D spends, even if only to avoid CSR, have done well because today’s R&D expenditure nourishes tomorrow’s business. “Firms reduce pre-tax profits beneath the threshold by increasing R&D expenses,” the report says.

They note that the increase in R&D expenses has tangible innovation impacts in the following years. “Firms proximate to the threshold that increases R&D expenses apply for one additional patent and announce two new products in the next three years than similar firms that did not increase their R&D expenses. This effect is particularly pronounced in firms with a prior history of innovation and firms in innovative industries,” the report says.

CSR regulations have also aided R&D more than direct incentives, the authors say. Firms can, and do relabel other operational expenses as R&D to take advantage of fiscal incentives like tax credits for innovations. Therefore, direct fiscal incentives can incentivise misleading information about innovation activities.

“Our results show a pathway through which indirect incentives generated by social policies can foster ‘real’ innovation without such relabelling concerns,” the report says.

[The Hindu Business Line]

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