Higher R&D spenders fail to secure success

Global Innovation 1000 report reveals little benefit from major investment

Investing large amounts of money on research and development (R&D) does not guarantee improved corporate performance, according to research published this week.

The Global Innovation 1000 report from consulting firm Booz Allen Hamilton, concludes that there is no relationship between spending on R&D and the primary measures of economic or corporate success.

The news will concern the world’s 1,000 largest corporate investors in innovation, who collectively spent $384bn (£219bn) on R&D in 2004. The IT industry accounts for nearly 40 per cent ($154bn) of that figure.

‘R&D has been such an article of faith, especially in the IT sector. People believe that if you invest, good things in the form of higher profits and growth, will come,’ said Barry Jaruzelski, vice president of Booz Allen Hamilton’s global technology practice.

But while spending too much is no guarantee of strong profits, the survey says spending too little can have a detrimental effect on performance. Companies in the bottom 10 per cent of R&D-to-sales ratio perform worse than higher investors.

‘We are not saying that firms should rush out and cut their budgets. There’s definitely a minimum threshold for R&D spending. However, there is no significant difference being in the top 10 spenders, rather than just being in the middle of the pack,’ said Jaruzelski.

With an ideal level of R&D spending difficult to determine, the report recommends a tight focus on the process of innovation, to ensure that new ideas can be properly converted into commercial products.

‘For many organisations, R&D is a black box, which is more art than science. Businesses need to focus on how to select projects and bring them to market,’ said Jaruzelski.

IBM, which has an annual R&D budget of $5.7bn (£3.25bn), says it is vital that basic research is linked to commercial reality.

‘We used to be an isolated inventor of new technology but we weren’t that good at getting those turned into products on the market,’ said Paul Horn, senior vice president for research.

Horn says IBM, which has the second-highest R&D budget in the IT industry after Microsoft, has become increasingly successful at ensuring that its exploratory work is carried into its hardware and software products.

‘You’re only going to be successful if you have channels that connect your researchers to the marketplace,’ he said.