Total R&D spending growth at large companies fell last year to the second lowest rate in a decade, Chinese innovation spending growing impressively

Innovation leaders say they are better at innovation now than they were 10 years ago; the most successful innovators tap customers’ unarticulated wants and needs

Beijing, October 30, 2014 – While total R&D spending at large companies rose to its highest level ever in 2014, the growth rate was the second lowest in a decade, according to a new study from Strategy&, part of the PwC network.

The tenth annual Global Innovation 1000 Study, which analyzes the R&D investment at the 1,000 biggest-spending public companies in the world, found that R&D spending rose by only 1.4% last year – a more modest increase than the 3.8% rise the year before and a marked drop from the 10-year average growth rate of 5.5%. R&D spending as a percentage of revenue fell by 17% between 2005 and 2014.

“Companies say they’re better at innovating today than they were a decade ago,” says Steven Veldhoen, partner at Strategy&, formerly Booz & Company and Head of China Innovation Practice. “It seems that companies can now do more with less, allowing them to moderate spending growth while still achieving results.” (Click here for an overview of the study’s findings.)

The total R&D spending of companies headquartered in China included in this list reached $29.96 billion this year, which showed an increase of 46% comparing to the $20.53 billion last year, while North American and European companies increased spending by only 3.4% and 2.5%, respectively, and Japanese companies spent 14% less. The R&D spend by companies headquartered in China represents 4.63% of this year’s total Innovation 1000 R&D spend.

Furthermore, the number of Chinese companies represented in the Global Innovation 1000 rose from eight (2005) to 114 (2014) in the past decade – an increase of 1,325%. There is a 52% increase comparing with last year’s 75 Chinese companies entered in this list. PetroChina (62) surpassed all other Chinese companies by spending $2303 million in total on R&D. It is also the only Chinese company which ranked top 100 in this year’s list.

Successful companies mine end-users’ unarticulated wants and needs
Apple, Google, Amazon and Samsung top the list of the 10 Most Innovative companies in 2014 as identified by survey respondents. Among the full list, only three – Google, Samsung and Microsoft – are also on the Top 10 R&D Spenders list. In fact, over the past ten years only Microsoft has been among the Top 10 R&D Spenders and Top 10 Most Innovative companies each year. And although four of the Top 10 R&D Spenders in 2014 were healthcare companies, not a single healthcare company was voted among the 10 Most Innovative by survey respondents.

“This goes to show that when it comes to innovation, it’s not what you spend but how you spend it that counts,” says Bill Peng, partner at Strategy&.

“What many highly innovative companies have in common is not a high level of R&D spending, but an understanding of end-users’ wants and needs,” adds Bill. “Instead of depending on market research, these companies intimate connections with customers and innovate around their yet-to-be-articulated needs.”

Companies believe they are getting better at innovation, but admit they need to improve more
More than three-quarters of innovation leaders (76%) say that they are better at innovation today than they were 10 years ago, according to a survey of over 500 innovation leaders across nearly 500 companies. And about the same number (78%) believes they have developed a more detailed understanding of their customers’ wants and needs over the past decade.

Despite this strong sense of improvement, most surveyed innovation leaders believe they have room to grow. Only 41% say their companies are highly proficient in the innovation areas that they have tried to improve in the past, and just 27% believe they are mastering the elements they will need for innovation success over the next 10 years.

For more information on the study and its findings, including the innovation strategies that companies are pursuing, please click here.

Methodology
Strategy& identified the 1,000 public companies around the world that spent the most on R&D, as of June 30, 2014. The Global Innovation 1000 companies collectively account for about 40% of the entire world’s R&D spending, while the next 1,000 largest corporate spenders only represent an additional 3%. For each of the top 1,000 companies, Strategy& obtained from Bloomberg and Capital IQ key financial metrics, including sales, gross profit, operating profit, net profit, historical R&D expenditures and market capitalization. To understand how innovation has changed at companies over the past 10 years and what to expect for the next decade, Strategy& conducted a separate online survey of 505 innovation leaders at 467 companies around the world. The companies participating in the survey represented just under US$130 billion in R&D spending, or 20% of this year’s total Global Innovation 1000 R&D spending, all nine of the industry sectors and all five geographic regions.


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