Corporate R&D Spending Declines

Total R&D spending among the world’s top spenders on innovation dropped in 2009 for the first time in the 13 years studied, according to the 2010 Global Innovation 1000, the sixth annual study of corporate innovation spending conducted by global management consulting firm Booz & Company.

 

The study revealed that the 1,000 companies that spent the most on research and development decreased their total R&D spending by 3.5% to $503 billion in 2009. This followed a relatively strong 2008 during which R&D spending continued to grow despite the recession.

 

At the same time, revenues for the Innovation 1000 plunged 11% from US$15.1 trillion in 2008 to $13.4 trillion in 2009 – nearly three times the rate of decline in R&D spending. As a result, R&D intensity, or R&D spending as a percentage of revenue, actually increased – from 3.46% in 2008 to 3.75% in 2009. Compared to the 3.5% reduction in R&D spending, the 1,000 top R&D spenders cut much more deeply into both sales, general and administrative expenses (a 5.4% reduction), and capital expenditures (a 17.5% drop).

 

“It’s no surprise that the worldwide recession finally caught up with the world’s top innovation spenders in 2009, causing them to trim their innovation budgets. However, the relatively modest cuts in R&D spending compared to much larger declines in revenues demonstrates the continued importance of innovation as a critical component of corporate strategy to companies in every industry,” says Barry Jaruzelski, Partner at Booz & Company. “As the recession draws to a close and corporate earnings rebound, 2010 will be an important test of their commitment to innovation. Indeed, the most forward looking companies will likely move quickly to restore the R&D cuts they made in 2009.”

 

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.

 

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. Given the recession’s overall effect on innovation spending, companies headquartered in regions hit hardest cut R&D spending the most, on average.

 

The survey found that companies that focus on a set of innovation capabilities most consistent with their innovation strategy and tightly aligned with their overall corporate strategy outperform their rivals. Companies in the Global Innovation 1000 that take such a coherent approach to capabilities reported higher profit margins than their competitors, by up to 22%.

 

“There is no statistically significant relationship between financial performance and the amount spent on innovation. What really matters are the particular combinations of talent, knowledge, team structures, tools and processes that successful companies put together to enable their innovation efforts,” says Kevin Dehoff, Booz & Company Partner. “Our study found that innovators who achieve this state of ‘corporate coherence’ consistently outperform their rivals on several financial measures.”

 

The survey further 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% of those surveyed, followed by Google with 49%. 3M followed next with 20%. Only three of the companies on the “ten most innovative” list also appear on this year’s top spenders list: Toyota, Microsoft and Samsung, reiterating the lack of correlation between the magnitude of R&D spending an innovation results.

 

 

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