Booz and Company study: Companies continue to spend in research and development despite downturn

In the face of a severe global recession, the world's 1,000 largest publicly traded corporate research and development spenders 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% to $532bn, even as sales were up only 6.5%. While the increase in 2008 R&D spend was less dramatic than 2007 's gain of 10%, it was just slightly less than the 7.1% 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%) reporting that net income plummeted last year, according to the study. More than a quarter of companies decreased their R&D allocation in 2008.

Booz & Company analyzed the world's top 1,000 public corporate research and development spenders - the Booz & Company Global Innovation 1000 - in what continues to be the most comprehensive effort to assess the link between R&D and corporate performance. 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% of those surveyed say that innovation is critical as their companies prepare for the upturn, and fully 70% 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% while reducing overall capital expenditures by 1%.

"Reducing efforts on innovation would be similar to unilateral disarmament in wartime," said Hatem Samman, the Director of the Ideation Center—Booz & Company's leading think tank in the Middle East. "Now is an opportune time to build advantage over competitors, especially weaker ones that may have to skimp on R&D for financial reasons. Overall, the study demonstrates an optimistic outlook on the part of the companies in the Innovation 1000."

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 Samman.

"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% 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, more innovative, products that have the potential to grow faster.

The top 20 innovation spenders increased their budgets by just 3.2%. This gain is less than one-third the 10.7% rise in 2007 and was the result of a precipitous 35% drop in net income among the 20 companies, which fell from $115bn in 2007 to just $75bn in 2008. Still, the top 20 spenders accounted for 26% 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%), health (23%), and automotive (16%).

•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% of auto companies in the Global Innovation 1000 decreased R&D spending, compared with 25% who decreased R&D last year. Yet the remaining 40% 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%.
• 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%, 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% -- followed by Software and Internet (11.4%). In contrast Telecom, and Chemicals and Energy, spent the least, 1.4% and 0.9%, respectively.
• Aerospace and Defense was the only industry to see innovation spending sink, down 2.3%.

Every global region increased its spending. North American, European, and Japan-based companies retained their 94% 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%, Europe by 6.3% and North America, 6.5%. These levels were below the global five-year CAGR of 7.2%. In the Middle East, "Gulf Cooperation Council countries are moving ahead with plans to spur innovation through R&D", said Samman. Last September, one of the largest graduate research institutions in the region, King Abdullah University of Science and Technology (KAUST), was inaugurated. Backed by a $10bn endowment fund and partnership with internationally renowned research universities, KAUST is expected to partake in the fulfillment of the region's innovation aspirations. Indeed, additional billions in financial support, unabated by the global recession, are budgeted for R&D across the kingdom; some of these funds are administered by King Abdul Aziz City for Science and Technology, and are intended to translate R&D activities into commercially viable results.

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 $9bn spent by #1 Toyota to the $58m 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% of the total R&D spend of the Innovation 1000.
• Sales of the Global Innovation 1000 grew 6.5% to $15 trillion in 2008, a significantly smaller increase than the 10% increase this group registered in 2007, and R&D spending as a percentage of sales remained the same as the previous year, 3.6%.
• North American-headquartered companies on this year's list spent 4.6% of sales on R&D, a slight decrease compared with 2007, while Japanese-headquartered companies spent 3.7% of sales, significantly up from last year, and European-headquartered companies spent 3.2%, a decrease from the prior year.
• Booz & Company estimates that the Global Innovation 1000 accounts for 81% of 2008 total global corporate R&D spending of $660bn.

Booz & Company Global Innovation 1000: Study Methodology

Booz & Company identified the 1,000 public companies around the world that spent the most on research and development in 2008 (companies for which public data on R&D spending was available).

Booz & Company analyzed key financial metrics for each of the top 1,000 companies for 2001 through 2008 — sales, gross profit, operating profit, net profit, R&D expenditures, and market capitalization. All expenditure figures were translated into U.S. dollars according to the average exchange rate for the year. In addition, total shareholder return was gathered and adjusted for each company's corresponding local market total shareholder return.

Each company was coded into one of 10 industry sectors (or "other") according to Bloomberg's industry designations, and into one of five regional designations according to reported headquarters locations for each company. To enable meaningful comparisons across industries on R&D spending levels, Booz & Company indexed the R&D spending level and financial performance metrics for each company against the median R&D spending level for that industry.

Booz & Company also conducted a web-based survey of over 300 senior managers and R&D professionals from 250 different companies around the globe in order to better understand the recession's impact on R&D spending and strategy. The companies participating represented more than $230bn in R&D spending, or 44% of the total Innovation 1000 R&D spending for 2008. Respondents came from all 10 industry sectors; geographically, 49% came from North America, 38% from Europe, 13% from Asia, and less than 1% from the rest of the world.