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R&D ROI-is there one?

October 20, 2005

2 Min Read
R&D ROI-is there one?

While many, this magazine included, have beaten the drum of innovation as a means to succeed in an increasingly competitive global marketplace, a new study finds that there is no discernable statistical relationship between the amount of money spent on research and development (R&D) and accepted measures of business success like sales growth, gross profit, operating profit, or market capitalization.

In an analysis of the top 1000 R&D spenders in the world, management and technology consulting firm Booz Allen Hamilton Inc. (McLean, VA) found that while those companies tended to yield better gross margins, results otherwise were haphazard. "There is no easy way to achieve sustained innovation success; you can''t spend your way to prosperity," Booz Allen VP Barry Jaruzelski concluded in a press release announcing the findings. "Successful innovation demands careful coordination and orchestration both internally and externally. How you spend is far more important than how much you spend."

In spite of this conclusion, Booz Allen found that spending on R&D by the top 1000 has grown 6.5% on average since 1999, reaching $384 billion in 2004. Since 2002, it has grown even faster, averaging 11%/yr increases. The report found that larger companies showed better returns on their R&D investments than smaller firms, and that companies that spent relatively little on R&D, the bottom 10% of the survey, under performed competitors on the basis of gross margins, gross profit, operating profit, and total shareholder returns.

Companies in mature regions like North America, Europe, and Japan account for 96.8% of the R&D spending of the survey group, but investment in new technology in places like China and India is growing at a much faster rate. From 1999 to 2004, China and India averaged 21.1% growth in R&D spending, much faster than North America (6.6%), Europe (6.2%), and Japan (4.8%). Still, companies in the survey from China and India spent only 1% of revenue on R&D, compared to 4.9% in North America, 4% in Europe, and 3.8% in Japan.

Booz Allen estimates that this group of 1000 represents fully 80-90% of total global corporate R&D spending, and 60% of all R&D spending, including that by governments. The top ten R&D spenders in 2004 in descending order were Microsoft, Pfizer, Ford, DaimlerChrysler, Toyota, General Motors, Siemens, Matsushita Electric, IBM, and Johnson & Johnson.

In terms of industry, chemicals and energy (1.4%) was among the slowest to show growth in R&D spending, software and the Internet (15%) and health (12.4%) were the fastest. Computing and electronics garnered the most R&D money (25%), followed by health (20%), and automotive (18%).-Tony Deligio; [email protected]

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