Corporate R&D spending rebounds to $550B in 2010, but R&D intensity declines

The 1,000 companies that spent the most on research and development in 2010 increased their investment by 9.3 per cent to $550 billion, rebounding from 2009’s 3.5 per cent decline and marking a return to the long-term growth trajectory for R&D spending, according to the seventh annual study by the management consulting firm Booz & Company.

However, the 2010 increase in R&D did not keep pace with the 15 per cent spike in revenue among the Global Innovation 1000 companies, resulting in a slight decline in R&D intensity - that is - R&D spending as a percentage of revenue, from 3.76 per cent in 2009 to 3.52 per cent in 2010. However, Booz says this was a natural balancing out of the long term trend, given that in 2009 most companies did not cut R&D budgets nearly as deeply as their double digit decline in sales might have indicated.

“Clearly, 2010’s R&D increases confirm a continued commitment to invest in new and improved products and services in ever-more competitive markets around the world. However, much of the R&D growth represents catch-up rather than higher levels of new investment,” said Barry Jaruzelski, Partner at Booz & Company.

The study also looks at how organisations can get the best return on their R&D investment. New to this year’s study is an in-depth examination of the role of corporate culture on innovation effectiveness and financial performance, based on a separate survey of nearly 600 innovation leaders in companies around the world.

Some key findings

In all, 68 per cent of the companies raised R&D spending in 2010, with three industries accounting for 77 per cent, or $36.1 billion, of the total $46.8 billion increase: Computing and electronics, health, and automotive. Industries experiencing the greatest percentage increase in R&D spending were software and internet at 11 per cent, health, 9.1 per cent and industrials, 8.5 per cent.

The computing and electronics sector saw the biggest absolute increase in R&D spending and remained the number one industry for innovation expenditures, accounting for 28 per cent of the total. With revenues up 14.2 per cent, the computing and electronics sector increased innovation outlays by 6.1 per cent, or $16.9 billion. However, for the first time since the inception of the Global Innovation 1000 study, no high-technology company was among the top three R&D spenders.

Health was second among industry sectors in share of total R&D expenditures at 22 per cent. The industry increased outlays by 9.1 per cent, or $10.4 billion, the highest rate of increase among the top three industries in 2010 and in line with the overall R&D increase of 9.3 per cent across all sectors.

The health sector - with most of the spending coming from pharmaceutical companies - captured four of the top five spots in spending among the Global Innovation 1000 and eight out of the top 20 firms in total R&D spending.

Automotive retained third place with a 15 per cent share of total spending, due to a spending boost of 8 per cent, or $8.8 billion, in 2010, a significant change after cutting R&D by 14 per cent in 2009. Revenues for the auto sector were up 16.5 per cent over 2009.

Companies in India and China

Globally, every region increased innovation spending in 2010, a significant turnaround compared to the previous year when the three regions making up the lion’s share - North America, Europe and Japan - all cut back. India- and China-based firms again increased their total R&D outlays at a far higher rate than those in the three largest regions:

The turnaround was cautious in Europe and Japan headquartered companies, which saw 5.8 per cent and 1.76 per cent increases in R&D spending, respectively. North American headquartered companies, after cutting R&D by nearly 4 per cent in 2009, increased R&D spending by 10.5 per cent in 2010, beating the overall global growth rate of 9.3 per cent.

China and India, and to a lesser extent countries outside of North America, Europe, Japan and Asia, continued to boom, albeit from a small base. Accounting for 2 per cent of global R&D outlays in 2010, Chinese and Indian headquartered companies upped R&D investment by more than 38 per cent, almost identical to the previous year’s growth pace. Companies from other regions around the world boosted R&D almost 14 per cent.

The top 20 global spenders averaged 10 per cent R&D growth, representing $142 billion in R&D on sales of $1.6 trillion. This exceeded the 9.3 per cent increase for all Global Innovation 1000 companies. Swiss pharmaceutical company Roche led the global pack for the second year in a row, with an R&D outlay of $9.6 billion of its $45.7 billion in revenues on innovation, an R&D intensity rate of more than 21 per cent. Toyota Motor, the top R&D spender for several years prior to the recession, fell from fourth to sixth place with a spending increase of under 1 per cent.

Pfizer at number 2, Novartis at 3, Microsoft at 4 and Merck at 5 rounded out the top five spenders. Ford was the only company exiting the top 20, and AstraZeneca the sole newcomer, moving into 18th place.

R&D spending does not equate to innovation

When it comes to innovation, spending doesn’t correlate with success. As part of a web-based survey of nearly 600 innovation executives from over 400 leading companies in every major industry sector, Booz asked respondents to name the companies they considered to be the most innovative in the world. For the second year in a row, Apple led the top 10, followed by Google and 3M. This year, Facebook was named one of the world’s most innovative companies, entering the list at number 10.

In a comparison of the firms voted the ten most innovative versus the top ten global R&D spenders, Booz  found that the most innovative firms outperformed the top ten R&D spenders across three key financial metrics over a 5-year period - revenue growth, EBITDA as a percentage of revenue and market cap growth - consistent with last year’s findings. Just three of this year’s top 10 spenders also ranked among the top 10 innovators: Microsoft, Samsung and Toyota Motor.

Corporate culture matters for innovation success

For the first time, this year’s Global Innovation 1000 provides a deeper look into the impact on the intangible factor of corporate culture on companies’ ability to innovate successfully. The key finding is the belief that culture is key to innovation success, and its impact on performance is measurable. Specifically, the 44 per cent of companies who reported that their innovation strategies are clearly aligned with their business goals - and that their cultures strongly support those innovation goals - delivered 33 per cent higher enterprise value growth and 17 per cent higher profit growth on five-year measures than those lacking such tight alignment.

In analysing the three distinct innovation strategies identified by Booz for creating and taking products to market - Need Seekers, Market Readers and Technology Drivers - the study demonstrated that a Need Seekers strategy stands out for facilitating the strongest alignment of innovation and business strategies with culture, and achieving superior financial performance over time

Need Seekers are companies that consistently strive to be first movers and engage customers to shape new innovations, and are three times more likely than the average company to report strong alignment of culture with innovation and business strategies.

Among companies identified as Need Seekers, 70 per cent say their culture strongly supports innovation strategy, as compared to 27 per cent of Market Readers, who adopt a second mover strategy and emphasise incremental change, and 37 per cent of Technology Drivers, who stress technology achievement and both incremental and breakthrough change.

Booz & Company 2010 Global Innovation 1000 study