CORPORATE R&D SPENDING IN DECLINE IN 2009

According to Booz & Company Global Innovation 1000 Study, corporate R&D spending declined during the 2009 downturn. The report also shows how vacuous the concept of innovation has become and its separation from R&D.

The report, the sixth annual study of corporate innovation, notes that total research and development (R&D) spending among the world’s top spenders on innovation dropped in 2009 for the first time in 13 years: the 1,000 companies that spent the most on research and development decreased their total R&D spending by 3.5 per cent to $503 billion in 2009. This followed a relatively strong 2008 during in which R&D spending continued to grow despite the recession.

Probably the most important finding is how the recession has hit corporate earnings:

  • Revenues for the Innovation 1000 plunged 11% from $15.1 trillion in 2008 to $13.4 trillion in 2009 — nearly three times the rate of decline in R&D spending:
  • R&D intensity, or R&D spending as a percentage of revenue, actually increased — from 3.46% in 2008 to 3.75% in 2009.

Surprisingly, in the face of these revenue reductions, the 3.5% reduction in R&D spending by the 1,000 top R&D spenders was less severe than the cuts they made into both sales, general and administrative expenses (a 5.4% reduction), and capital expenditures (a 17.5% drop).

The big question this nevertheless reveals is what these corporations will do with R&D spending once corporate earnings rebound in 2010?

Interesting insights

More than half of all companies Booz & Company tracked cut their R&D spending in 2009 and nearly all the cuts came in just three industries:

  • Auto, computing and electronics, and industrials.
  • The other seven industries examined — health, software and Internet, telecom, chemicals and energy, aerospace and defense, consumer and industrials — all increased spending to some degree.
  • The auto industry alone accounted for fully two-thirds of the $18 billion contraction in R&D spending;
  • The computing and electronics industry reported similar, but less drastic, R&D spending reductions with no change in the industry’s R&D intensity:
  • Despite a decline in R&D spending, computing and electronics retained its top spot as the industry that spent the most on innovation, while auto remained at number three. Healthcare took the number two spot, increasing R&D by 1.5%, much slower than the industry’s revenue growth rate of 6.0%.
  • Japan saw the largest percentage drop in spending by region in which a company was headquartered – 10.8%,  North American spending declined by 2.8%, while Europe’s declined by just 0.2%.

In contrast, companies headquartered in China and India boosted R&D spending by 41.8%, although from a small base, as they account for only 1% of total Global Innovation 1000 corporate R&D spending.

The vacuous concept of ‘Innovation’

To underline how vacuous the concept of innovation  has become, the report reveals some depressingly stereotypical insights. The survey asked innovation leaders to name three companies they consider to be most innovative in the world.

Apple far and away led the Top 10, named by 79 percent of those surveyed, followed by Google with 49 percent. 3M followed next with 20 percent. Only three of the companies on the “ten most innovative” list also appear on this year’s top spenders list: Toyota, Microsoft and Samsung.

While this reiterates the lack of correlation between the magnitude of R&D spending and innovation results, it highlights the recurrent problem we have been highlighting with innovation today in the Big Potatoes Manifesto: namely, that Apple, a company that essentially puts together other people’s innovations while paying attention to user interfaces, is now held up as the model of  ‘innovation’. This raises serious questions about what these ‘innovation leaders’ think R&D is really all about.

What the report fails to question is the relationship between risk taking and the willingness to invest in areas of research where there are no foregone conclusions about commercialisability, but where the source for future innovation might emerge. This would give a more accurate picture of the state of contemporary innovation. Sadly, this report is another missed opportunity to make this the focus of the public debate about the future of innovation.

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