Does R&D matter?

Shares of R&D-intensive companies outperform the stock market generally. Chart shows the average performance of 100 R&D companies, from 1997 to 2005, compared to the FTSE-100 index.
Source: 2004 R&D Scoreboard

For years, economists have debated whether investors care whether or not companies spend a lot on research & development. The verdict: They do care, but not always to the same extent.

The latest annual report from the UK government on science and technology includes the kind of stock chart (above) that would have an econometrician in raptures. It compares an index of stock prices of 100 R&D-intensive companies in Britain with the overall market index, the Financial Times-Stock Exchange 100. The snapshot is from 1997 to July 2005 – a period of boom, bust, and limping recovery among tech and pharma stocks. As you’d expect, the tech company shares went through the roof during the Internet boom, and then collapsed. But since then, when some measure of sanity has returned to markets, the R&D companies have still done a bit better than the market overall.

Cumulatively, over past eight years, the R&D stocks rose 69%, while the general shares index rose 7%. Of course, there are different ways of cutting the numbers. If you look more widely, at the 250 biggest companies rather than the top 100, the R&D bonus is narrower, but still visible: While the R&D companies rose 85%, the FTSE 250 rose 70%. And there is, no doubt, an economics thesis or two to be done here: Do regression analysis on the different measures of out-performance.

The UK report, the 2005 R&D Scoreboard, is a trove of other obscure facts to know and tell about global business and trade in science and technology. Of course, as a government report, a fair amount of this one is devoted to proving that the UK’s standing in global technology markets isn’t as bad as you might think. OK, the UK looks lousy compared to the US and Japan (and many EU countries) in R&D spending.

And yes, its patenting activity isn’t exactly sterling. But, the department argues, that’s in large part because so much of the UK economy is in finance, retail and other service industries with inherently low R&D activity – so what do you expect? Needless to say, that’s a tautological argument. You could equally argue that the UK does so poorly in the international comparisons – not because its non-R&D sectors are so strong – but precisely because its R&D industries are so hollowed out.

But among the most valuable tables in the report: which companies in the world invest most in R&D. The top five R&D spenders: Daimler-Chrysler, Pfizer, Ford, Toyota and Siemens. That’s cars, drugs and electronics.