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Getting Through Tough Times With Innovation

Incumbents are generously investing in R&D and here is why

9Nov

Global political and economic uncertainties have put businesses in tough situations. Markets are unpredictable which means that operation models and investment activity have to be constantly adjusted, forcing companies to come up with survival plans instead of focusing on growth. Incumbents are therefore trying to achieve self-sufficiency and flexibility from the external environment by relying on innovation, particularly, on R&D.

Today, American companies are less interested in building or buying equipment but are eager to invest in intellectual property products and their development. If business activity has to slow down due to outside influences, strong R&D and innovation can act as a plan B and help to maintain a company's confidence.

According to the WSJ and data from the Commerce Department, private fixed investment in R&D surged by 17% in Q2 2016 - the strongest performance since 2006. The increasing interest in R&D occurred due to humming tech and software sectors, with investments in industrials slowing down. Daniel Meckstroth, Chief Economist at the Manufacturers Alliance for Productivity and Innovation said: 'R&D is like your seed corn. In order to stay competitive, you've got to have products in the pipeline.'

One of the reasons behind this is disruption, which is impacting almost every industry. To remain agile, some incumbents choose sustainability to reduce operation costs and boost productivity, others want to build a strong innovation portfolio to capture market share and regain customers' trust. By acquiring IPs, developing brand new production lines, and experimenting with alternative business models, organizations have an opportunity to solve problems caused by the market turbulence. According to Strategy &, those who managed to refocus and allocated budget to R&D showed 25% faster revenue growth than those who didn't.

The healthcare sector is forecasted to become the leader in R&D spending which is expected to reach $165 billion globally by 2018, with Computing and electronics just behind at $ 159 billion. The shift will put industrials in fifth, with software and internet, and automotive sectors set to surpass it.

The need to maintain competitive advantage has been the main reason for R&D budget allocation. This combined with the influence of digital technology, the IoT, e-commerce, and fintech means that customer expectations are rising, and innovation is the only way to placate them. Robert Boroujerdi, Goldman Sachs' Head of American equity research expanded on this, saying: 'We view R&D as a way by which to gauge a company's focus on product and process innovation to adapt to an ever-evolving competitive landscape.'

So despite plummeting exchange rates, chaos in global and domestic politics, and stagnation in oil prices, innovation is something that is able to get incumbents through difficult times and help them to grow further.

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