increased spending

R&D Spending Increases Despite Recession Trends

In the face of a severe global recession, the world’s 1,000 largest publicly traded corporate research and development spenders actually increased spending on R&D in 2008, affirming the critical importance of innovation to their corporate strategies, according to global management consulting firm Booz & Company’s fifth annual analysis of global innovation spending, released today. R&D outlays for these companies rose by 5.7 percent to US$532 billion, even as sales were up only 6.5 percent. While the increase in 2008 R&D spend was less dramatic than 2007’s gain of 10 percent, it was just slightly less than the 7.1 percent global five-year compound annual growth rate (CAGR) for R&D.

Overall, more than two thirds of companies maintained or increased their R&D spending in 2008, despite more than a third (34 percent) reporting that net income plummeted last year, according to the study. More than a quarter of companies decreased their R&D allocation in 2008.

The study looked at R&D spending and its link to corporate performance, uncovering insights into how organizations can get the greatest return on their innovation investment. New to the study this year is an in-depth survey of nearly 300 senior managers and R&D professionals from 250 companies around the globe that probes the impact of the downturn on innovation spending and strategy.

Key findings of the report include:

Innovation is viewed as increasingly vital to corporate strategy. More than 90 percent of those surveyed say that innovation is critical as their companies prepare for the upturn, and fully 70 percent of respondents state their companies are either maintaining or increasing their spending on R&D in 2009, according to Booz & Company. Furthermore, the top 100 companies in the Innovation 1000 clearly signaled their investment priorities by increasing R&D spending by 3.2 percent while reducing overall capital expenditures by one percent.

Companies are spending more, but more wisely. “One result of the recession is that it has forced companies to think more carefully about their innovation processes and portfolios – for both good times as well as bad,” observed Kevin Dehoff, a Booz & Company Partner. “This held true through the most turbulent quarters these companies have navigated, indicating they’re ready to make smart bets that will pay dividends in the coming upturn.” Accordingly, the survey of senior managers and R&D directors reveals that seven in 10 companies are now adjusting their strategies to better capture changing customer requirements. Nearly half of the respondents report becoming more risk averse in their approach to innovation, changing the filters they apply when green lighting new R&D projects. More than 40 percent said their companies are focusing on process improvements to change R&D spend during the downturn, and a similar number say they’re getting better at killing bad projects, as well as focusing more on newer products that have the potential to grow faster.

The top 20 innovation spenders increased their budgets by just 3.2 percent. This gain is less than one-third the 10.7 percent rise in 2007 and was the result of a precipitous 35 percent drop in net income among the 20 companies, which fell from $115 billion in 2007 to just $75 billion in 2008. Still, the top 20 spenders accounted for 26 percent of spending by the entire Innovation 1000.

Recession’s impacts on R&D vary widely by industry. In 2008, as last year, two-thirds of R&D spending was concentrated in three industries: computing and electronics (28 percent), health (23 percent), and automotive (16 percent).

• No industry felt the pain more than auto with nine out of the top 10 R&D spenders in the category cutting their innovation outlays in 2008. Overall, 60 percent of auto companies in the Global Innovation 1000 decreased R&D spending, compared with 25 percent who decreased R&D last year. Yet the remaining 40 percent of auto companies on the list increased spending enough that the auto sector on a net basis slightly increased R&D spending overall by 0.6 percent.
• The Software and Internet sector, on the other hand, clearly has seen the recession as an opportunity. Eight out of the industry’s top 10 R&D spenders increased their R&D spending last year.
• R&D spending in the computing and electronics industry was up more than 4 percent, though the proportion of companies that increased R&D spending was essentially unchanged from last year.
• Healthcare companies spent the most on R&D as a percentage of sales –- 12 percent –- followed by Software and Internet (11.4 percent). In contrast Telecom, and Chemicals and Energy, spent the least, 1.4 percent and 0.9 percent, respectively.
• Aerospace and Defense was the only industry to see innovation spending sink, down 2.3 percent.

Every global region increased its spending. North American, European, and Japan-based companies retained their 94 percent share of the global 1000 innovation spend. Every region, including China and India, increased its expenditures, though they did so at slower rates. Japan upped its allocations by just 0.5 percent, Europe by 6.3 percent and North America, 6.5 percent. These levels were below the global five-year CAGR of 7.2 percent.

Additional study findings include:

• The top 10 global R&D spenders in 2008 were, in descending order: Toyota, Nokia, Roche Holding, Microsoft, General Motors, Pfizer, Johnson & Johnson, Ford, Novartis and sanofi-Aventis.
• R&D spending among the Global Innovation 1000 ranged from just under $9 billion spent by #1 Toyota to the $58 million spent by #1000 Laird PLC, a London-based maker of electronics equipment, a wide range that explains why the top 100 companies account for fully 62 percent of the total R&D spend of the Innovation 1000.
• Sales of the Global Innovation 1000 grew 6.5 percent to $15 trillion in 2008, a significantly smaller increase than the 10 percent increase this group registered in 2007, and R&D spending as a percentage of sales remained the same as the previous year, 3.6 percent.
• North American-headquartered companies on this year’s list spent 4.6 percent of sales on R&D, a slight decrease compared with 2007, while Japanese-headquartered companies spent 3.7 percent of sales, significantly up from last year, and European-headquartered companies spent 3.2 percent, a decrease from the prior year.
• Booz & Company estimates that the Global Innovation 1000 accounts for 81 percent of 2008 total global corporate R&D spending of $660 billion.