Watch:
There is no direct relationship between R&D spending and significant measures of corporate success such as growth, profitability, and shareholder return, according to a new global innovation study by Booz Allen Hamilton. However, the pace of corporate R&D spending continues to accelerate, as many executives continue to believe that enhanced innovation is required to fuel their future growth.
Booz Allen analyzed the world’s top 1,000 corporate research and development spenders—the Booz Allen Global Innovation 1,000—to identify the linkages between spending on innovation and corporate performance, and to uncover insights on how organizations can get the greatest return on their innovation investment.
Key findings of the study include:
Money doesn’t buy results. While the study identified individual success stories, there is no discernable statistical relationship between R&D spending levels and nearly all measures of business success, including sales growth, gross profit, operating profit, enterprise profit, market capitalization, or total shareholder return.
But innovation spending is still a growth business. The 2004 Global Innovation 1,000 spent $384 billion on R&D in 2004, representing 6.5% annual growth since 1999.
Larger organizations have an advantage. Scale provides an edge in innovation; larger organizations are able to spend a smaller proportion of revenue on R&D than smaller organizations with no discernable impact on performance.
Spending more doesn’t necessarily help, but spending too little will hurt. Companies in the bottom 10% of R&D spending as a percentage of sales under-perform competitors on gross margins, gross profit, operating profit, and total shareholder returns. However, companies in the top 10% showed no consistent performance differences compared to companies that spend less on R&D.
R&D spending by companies in developing nations is relatively small, but growing rapidly. While companies headquartered in North America, Europe, and Japan account for 96.8% of the Global Innovation 1,000’s R&D spending, and are likely to remain dominant players for the foreseeable future, companies with headquarters in China, India, and the rest of the world are turning up the volume on R&D investment.
Industries can’t agree on how much innovation spending is enough. Instead of clustering into any coherent pattern, R&D spending levels vary substantially, even within industries.
It’s the process, not the pocketbook. Superior results seem to be a function of the quality of an organization’s innovation process—the bets it makes and how it pursues them—rather than either the absolute or relative magnitude of its innovation spending.
Sources
- Booz Allen Hamilton Global Innovation 1000 study
- Global Innovation 1000 – Money Isn’t Everything (PDF file 273KB)