More Investment Less Profit? An R&D Investment Conundrum of a Financially Constrained Firm in a Supply Chain

Problem definition: In an era of rapid technology advancement, the role of research and development (R&D) has become increasingly crucial for a firm's growth. Despite its importance, some firms, especially small and medium enterprises (SMEs), suffer from financial constraints and cannot invest enough in R&D. The issue becomes even more intricate in a supply chain setting, where one firm's R&D investment influences another firm's profit and decisions. Methodology/results: To study the impact of a firm's financial constraint for R&D investment on the focal firm and the supply chain, we analyze a supply chain consisting of one supplier and one manufacturer, where the manufacturer has a cost-reduction R&D opportunity with limited resources. Interestingly, our analysis reveals that the manufacturer's profit may decrease, even if it can afford more investment, which we refer to as the "R&D conundrum" in a supply chain. Managerial implications: We investigate operations and information strategies that the manufacturer can take, including investing in R&D before the supplier determines its price, exploring multiple R&D alternatives, and keeping its financial budget private. To our surprise, although upfront investment causes a hold-up problem, the manufacturer can be better off from it. Moreover, having multiple R&D options and hiding the financial constraint does not necessarily benefit the manufacturer. These results speak directly to most practitioners with financial constraints in various supply chains