R&D proﬁtability: the role of risk and Knightian
Accepted: 7 June 2016 / Published online: 25 July 2016
Ó The Author(s) 2016. This article is published with open access at Springerlink.com
Abstract This paper provides the ﬁrst empirical
attempt of linking ﬁrms’ proﬁts and investment in
R&D revisiting Knight’s (Risk, uncertainty and proﬁt,
Hart, Schaffner & Marx, Boston, 1921) distinction
between uncertainty and risk. Along with the risky
proﬁt-maximising scenario, identifying a second, off-
setting, unpredictable bias that leads to heterogeneous
returns to R&D investments is crucial to fully
understand the drivers of corporate proﬁts. Consis-
tently with the Knightian theory that relates risk to
proﬁtability, we model the impact of risk and uncer-
tainty on proﬁts and provide a ﬁrst empirical attempt to
model the effect of ambiguity, a particular type of
uncertainty, on R&D returns.
Keywords R&D investment Á Operating proﬁts Á
Uncertainty Á Ambiguity Á Risk premium
JEL Classiﬁcations D22 Á D81 Á L20 Á L26 Á
The expected returns to R&D investment are typically
subject to strong uncertainty. Innovations can be
thought as unique events, and the process aimed at
producing them (i.e. R&D investment) is an intrinsi-
cally uncertain economic activity.
In R&D intensive industries, market failures are a
consequence of, among other reasons, uncertainty/risk
and appropriability of a ﬁrm’s results of its R&D efforts.
Although the terms risk and uncertainty are often used
interchangeably (Alvarez and Barney 2007), they have
different meanings and cause different types of market
failure. While uncertainty (the lack of information and
predictability of outcomes) hinders the decisionmaking,
risk results in a reduction of the total R&D investment or
in a shift to short-term projects, at the expenses of
longer-term projects which could potentially have
higher social return rates (Tassey 1997). This distinction
becomes relevant in the ﬁeld of entrepreneurship.
Because uncertainty is at the base of the emergence of
new opportunities, information and technological
resources can be even more critical than ﬁnancial ones
in explaining entrepreneurial outcomes (Kuratko et al.
2015). Therefore, both from an entrepreneurial and
innovation policy development perspective, it is key to
understand and explain the separate effects that uncer-
tainty and risk have on business outcomes.
Disclaimer The views expressed are purely those of the
authors and may not in any circumstances be regarded as
stating an ofﬁcial position of the European Commission.
S. Amoroso (&) Á P. Moncada-Paterno
JRC - European Commission, Ediﬁcio Expo, Calle Inca
Garcilaso 3, 41092 Seville, Spain
Small Bus Econ (2017) 48:331–343