Increasingly demanding markets, changes in technology and greater international competition have made the effective management of product R&D together with its associated costs essential. The magnitude of R&D costs are of concern to many companies, potentially inhibiting organizations from investing in new product development. Although rising costs of R&D and the growing dependence of companies on R&D for product leadership increase the need to plan and evaluate R&D activities more effectively, difficulties have been experienced in applying budgetary control systems to R&D. Despite such concerns, the published literature indicates that an emphasis on financial factors in setting the size of R&D budgets is becoming a competitive necessity. A review of the published literature suggests that interfunctional market coordination, the relative use of strategic alliances and the nature of competition in terms of product cost versus product innovation are potentially instrumental in influencing the degree of emphasis on financial factors in R&D budget setting. The results of the present study indicate that these three organizational and environmental variables result in an emphasis on financial factors in setting the size of R&D budgets. Implications drawn from the findings are discussed.