Wednesday, July 10, 2013

Analysing a company - The importance of R&D

Just ended my economics class awhile ago and there were some interesting discussions today. Some of the discussions include
1) the problems of ageing population in singapore, 
2) the restriction of foreign workers by increasing foreign worker levy
3) why singaporeans have to retire later as retirement age is constantly increasing.
All these are big topics and it has been debated for the past few years in our homeland, singapore.

So what has this got to do with our analysis of companies to invest? I think as our economy becomes more competitive and we face a shortage of manpower due to ageing population, companies need to restructure the way they do their business in order to stay competitive.

The restriction on foreign workers has impacted businesses in singapore already especially in the f&b sector, the services sector and construction sector etc. Why is the government imposing a higher levy on each foreign worker hired? Won't this increase the cost of the company and result in lower profits?

Yes, it will impact firms greatly especially those that rely heavily on cheap workers. The purpose of this policy is to increase the productivity of firms especially SMEs. In a way, it forces the company to use technology and rely less on workers. If you study economics, you'll know that for a developed country like singapore,  we cannot increase economic growth substantially by increasing capital or labour as developed countries faced a phenomenon called diminishing rate of returns. Developed countries need to grow by increasing technological change which improves productivity.  That is the direction that the singapore government hopes to steer the country into.

Technological growth is costly. Firms who can outgrow competitors are mostly those who invest in research and development (R&D). If you look at most of the successful firms in the world,  you'll realise that most of them invest greatly in R&D. Google and samsung are such examples. The amount they invest in R&D is enormous.

How about firms in Singapore?  Food and beverage firms face higher manpower cost due to tighter foreign labour policies. Breadtalk for example has invested in a new office building which they just moved into. Their central kitchen is located there together with their offices and they have a fully automated production line for their bakery in that building too. This helps to save cost for them greatly. The new building also house their R&D department which they are focusing a lot into it.

On the other hand, if a company does not constantly innovate and change the way it does its business, it may lose out to its competitors and even big market leaders like Nokia which was considered a giant in the telecom industry, is facing huge losses year after year.

We can have many ways of analysing a company and I think one important factor to look at is how much the company is investing in R&D. This will help the company to continue growing and have a sustainable business model.

4 comments:

  1. great article. thanks so much.

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    1. Hi Kyith,

      Thanks for the appreciation of my post. :)

      I wrote this post on the mrt while travelling back home.

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  2. Hi,

    Your post reminds me of a point make by Philip A. FIsher in the book called: Common stock and uncommon Profit.

    According to FIsher, we need to measure the company's research-and-development efforts in relation to its size. To develop new products, a company's research-and-development (R&D) effort must be both efficient and effective.

    This is a topic worthy of study as not all companies R & D efforts leads to more revenue and profit.

    An effective approach would be to study how much dollars sales or net profits has been contributed to a company by the results of the R & D Department over a period of time.

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    Replies
    1. Hi Solace,

      A very good point that you raised up. R & D is becoming increasingly important in this competitive market.

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