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Should We Throw Money At R&D?

Is more money for R&D really the best way to innovate?

30Nov

The general consensus used to be that the more you spent on R&D, the more innovative you were.

Back in 2011 there was evidence to suggest that the tide was turning. A quick glance down the top 20 biggest R&D spenders, and you would have noticed that none of the companies most associated with innovation were present. Facebook, Amazon, Apple and Google were nowhere to be seen. Nokia, however, was ninth - the company still most recognizable for its 1100 model,the world's best selling phone.

While not all of the companies listed were relying on past glories, some, including IBM and Nokia, were not the powers they once were. This led Adam Hartung to state that big R&D spenders weren't seeking innovations but 'spending vast sums attempting to sustain (or recapture) historical success.' Adding that true innovators don't focus on how much they spend, but where they spend it.

The 2015 table is different. Facebook are still absent, but the three companies previously mentioned are all there - and high up the table too. Across all countries and industries, Google was the sixth highest spender and Apple's R&D expenditure was almost two-billion dollars in April - a $500 million year-on-year increase. The company's CFO went as far as to say that ‘R&D is the core of the company.'

Hartung's theory still has weight. As a percentage of revenue, Apple and Google's expenditure is still low - especially compared to Intel, Pfizer and AstraZeneca. This would imply that the biggest companies still concentrate on where they spend money on research. If you take Apple and IBM - two companies which had relatively low R&D to sales ratios from 2004 to 2005 - Apple developed its own operating system and iTunes, while Intel did relatively little. A Bernstein report also found that technology companies which spent less on R&D performed better over 1, 3, 5 and 10 year periods on Wall Street. This led Bloomberg to refer to a Thomas Edison quote to sum up R&D: 'Invention is 10 percent inspiration and 90 percent a waste of everyone’s time.'

As technology companies increase their portfolios, R&D still has a place. Defining a company's capacity to innovate, however, by the amount of money they spend on R&D is also shortsighted. Instead, it's about where a company invests the money.

A company shouldn't throw money at R&D, but have a strategic plan about where the investment should be targeted.

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