Study Finds Research and Development Money Doesn't Buy Results

Research Spending

There is no direct relationship between R&D spending and common measures of corporate success such as growth, profitability, and shareholder returns, a new survey concludes.

Nevertheless, the survey by management consulting firm Booz Allen Hamilton finds that the pace of corporate R&D spending is accelerating, as many executives continue to believe that enhanced innovation is required to fuel future growth.

The survey found that the world’s top 1,000 corporate R&D spenders invested $384 billion on R&D in 2004, representing 6.5% annual growth since 1999 and 11.0% annual growth since 2002. Health care companies made up 21% of R&D spending last year, while chemical and energy firms were 7% of the total. On average, the 1,000 companies spent 4.2% of their sales on R&D.

But Booz Allen found that, on the whole, the money didn’t buy results. The company compared the R&D-to-sales ratio with sales growth at the 1,000 firms over six years and found no correlation. Likewise, patents don’t correlate with performance. Chemical and energy companies that won fewer than 40 patents in 2003 experienced 7.8% annual growth over the six years, while chemical and energy firms with 40 or more patents that year experienced just 4.7% growth.

Superior results, the consulting firm concludes, are a function of the quality of an organization’s innovation process rather than of absolute spending. “Of all the core functions of most companies, innovation may be managed with the least rigor,” says Booz Allen Vice President Kevin Dehoff. “The key is to identify the priority areas where process improvements will have the greatest impact.”