The Booz Allen Hamilton Global Innovation 1000: Money Isn't Everything; Barry Jaruzelski, Kevin Dehoff and Rakesh Bordia; Booz Allen Hamilton, New York, NY; 2005; Available at www.boozallen.com and www.strategy-business.com (Issue 41, Winter 2005).
This analysis of the top 1,000 global R&D spenders finds no direct relationship between R&D spending and such measures of corporate success as growth, profitability and shareholder return. However, the study also finds the pace of corporate R&D spending continuing to accelerate, as many executives believe that enhanced innovation is required to drive future growth.
Booz Allen analyzed its "Global Innovation 1,000" to identify the linkages between spending on innovation and corporate performance and to understand how organizations can get the greatest return on their innovation investment. While the study identified individual success stories, it found no discernable statistical relationship between R&D spending and nearly all measures of business success, including sales growth, gross profit, operating profit, enterprise profit, market capitalization, or total shareholder return.
R&D spending does appear to yield better gross margins, the report says. However, "this narrow departmental success is not generally translated into overall corporate performance."
"There is no easy way to achieve sustained innovation success-you can't spend your way to prosperity," said co-author and Booz Allen vice president Barry Jaruzelski. "Successful innovation demands careful coordination and orchestration both internally and externally. How you spend is far more important than how much you spend."
Nevertheless, the Global Innovation 1,000 spent $384 billion on R&D in 2004, representing 6.5% annual growth since 1999. And the pace is accelerating-measured from 2002, the annual growth rate jumps to 11.0%. Among other principal findings:
* Larger organizations are able to spend a smaller proportion of revenue on R&D than smaller organizations, with no discernable impact on performance.
* 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.
* 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 headquartered in China, India and the rest of the world are rapidly increasing their R&D investment:
* The annual growth rate for R&D spending from 1999 to 2004 in China and India was 21.1%, significantly higher than in North America (6. …