As the economic outlook in many countries becomes uncertain, some managers look to cut costs in research and development to provide a short-term boost to profits. The problem with this strategy is that it reduces the opportunities for new products and product improvements in the coming years, which are necessary for the long-term competitiveness of the firm. As Intel Chairman Craig Barrett says, “You cut off your future if you do not invest.”

Required
1. What role does risk aversion play in determining the amount to invest in research and development on an ongoing basis? How would a firm manage risk aversion so as to continue the desired level of spending on research and development?
2. What type of strategic business unit would you choose to evaluate the performance of the research and development department? Explain your choice briefly.