Booz & Company’s fourth annual analysis of the world’s 1,000 largest publicly traded corporate research and development spenders, released today, found that these corporations continue to invest aggressively in R&D -- spending a total of US$492 billion on research and development in 2007, a 10% rise over the previous year, and well over the compound growth rate of 6.7% since 1999. The majority of these companies (91%) conducted their R&D activities in multiple countries beyond that in which they are headquartered.
The Booz & Company study found that the average global multi-national corporation spends just 45% of its total corporate R&D dollars in its home country, while the majority is invested in other countries in its global footprint to capitalize on specialized R&D skills, proximity to new markets and insights into local customers. As in previous years, there is no statistically significant evidence that a higher level of R&D spending relative to peers assures better results. However, companies that invested more than 60% of their R&D spending outside their home countries over the past three years appeared to enjoy superior performance in total shareholder return, operating margin, market cap growth and return on assets. Further, companies investing a higher percentage of R&D resources overseas than their percentage of sales overseas had three-year market cap growth fully 50% higher than those that invested at lower levels.
Booz & Company analyzed the world’s top 1,000 public corporate research and development spenders – the Booz & Company Global Innovation 1000 – in what continues to be the most comprehensive effort to assess the influence of R&D on corporate performance. The study looked at R&D spending and its link to corporate performance, and uncovered insights into how organizations can get the greatest return on their innovation investment. New to the study this year is an in-depth examination of the geographic distribution of R&D dollars of a subset of 184 of the top spenders among the Global Innovation 1000 companies, a group that represents $351 billion in 2007 R&D spending, a total that amounts to 71% of the total Innovation 1000 and 57% of all private sector R&D spending in the world. This sample covered the R&D activities conducted by these companies at over 3,400 engineering and research facilities, spanning 47 countries.
Key findings of the study include:
For many countries, the flow of innovation monies goes two ways. The analysis of the 184 company subset found that even though those companies based in the U.S. perform $80.1 billion worth of R&D in other countries, the companies headquartered elsewhere poured $42.6 billion into R&D conducted in the U.S. In other words, 40% of the money spent on R&D in the U.S. is spent by companies headquartered elsewhere. Other countries with significant two-way movement of R&D dollars include Germany, the U.K., France and Japan.
The U.S. received the largest amount of R&D dollars from foreign companies for product development activities. As a result of these substantial inflows, the U.S. is the largest country in terms of where corporate R&D is actually conducted—by a factor of 2.7 times over the second-largest Japan. However, China and India were the top net “importers” of R&D spending, receiving $24.7 billion and $13 billion, respectively from the 184 companies in the subset analysis, while spending far less on R&D abroad. Other top net recipients of foreign company R&D monies include Canada, Israel and the U.K.
Labor arbitrage is fading as a reason to move R&D offshore. The Booz & Company analysis found that lower engineering labor rates explain only a third of moves to site R&D facilities overseas, as labor costs soar in many low-cost countries. The study found there is still some money to be saved by arbitraging labor costs – those investing more than 10% in low-cost countries such as China and India did 25% better on three-year sales growth and up to 67% better on three-year market-cap growth. “Companies that look offshore are no longer just focused on lowering their labor costs. Increasingly, global companies need access to talented engineers and scientists around the world – and access to local market insight to better develop new products,” said Barry Jaruzelski, Partner at Booz & Company. “They are designing a global R&D footprint that aligns growing markets, essential skills and cost savings. These factors are the building blocks of a performance payoff.”
A dispersed global R&D network is less effective. Companies that operated a multi-geography network of fewer and larger R&D facilities performed 30% better on three-year operating income growth and total shareholder return, and 40% better on three-year market-cap growth. “A highly focused R&D footprint improves coordination among sites, and focuses a company’s talent pool in its R&D hubs that benefit from scale,” said Kevin Dehoff, Booz & Company Partner. In contrast, those with smaller, more dispersed site strategies “experience execution problems,” he added. The study finds, in fact, that nearly half of companies that deployed R&D resources globally did not reap the benefit they anticipated.
India and China-based companies are still small R&D players – but they are growing fast. Though tiny players on the worldwide R&D stage, accounting for just 1% of Innovation 1000 total spending, companies headquartered in India and China increased their absolute R&D spending by 22%, outpacing the worldwide compound annual growth rate of 5.6%. Europe boosted its spending by 12%, increasing its share of global R&D spending to 31%. North America had a lower growth rate in spending at 9%, but maintains the largest share of R&D spending in the Innovation 1000 at 42%. In all, companies headquartered in North America, Europe and Japan accounted for 94% of the Innovation 1000 spending, a proportion that is down 1% from last year.
Two-thirds of R&D spending was concentrated in just three industries in 2007: computing and electronics (29%), health (22%), and automotive (16%). Their R&D footprints reflect different competitive and management challenges:
In computing and electronics, access to talent and ideas drives the global R&D footprint as a significant portion of research can be used in products for sale in just about any market. Fully 70% of this sector’s R&D spending originates in companies headquartered in just two countries – the U.S. and Japan – yet less than 40% of this spending actually takes place there. The rest is spread among more than 20 different countries.
In health, about 30% of R&D spend is devoted to research, and 70% to product development, and for the latter, about two-thirds is spent in emerging markets in order to recruit clinical trial participants cost-effectively. The research side has been slower to establish a presence in emerging markets; in 2007 close to 95% of R&D went to drug discovery in the U.S., Europe and Japan.
While 83% of the automotive industry’s 2007 R&D spending came from three countries—the U.S., Germany and Japan—just 60% of total R&D spending took place in those three home countries. Diversification of R&D in this industry is motivated by the desire to increasingly locate design efforts in fast growing, emerging auto markets like China and Eastern Europe.
Additional study findings include:
The top 10 global R&D spenders in 2007 were, in descending order: Toyota, General Motors, Pfizer, Nokia, Johnson & Johnson, Ford, Microsoft, Roche Holding AG, Samsung Electronics and GlaxoSmithKline.
R&D spending among the Global Innovation 1000 ranged from the $8.4 billion spent by #1 Toyota to the $53.4 million spent by #1000 Dongbu Hiteck Co Ltd. (of Korea), a wide range that explains why the top 100 companies account for fully 63% of the total R&D spend of the Innovation 1000.
Sales of the Global Innovation 1000 grew almost 12% to $13.2 trillion in 2006, two percentage points faster than R&D spending in 2006, representing a decline in R&D spending as a percentage of sales to 3.7%, from 3.8% in 2006, continuing a ten-year downward trend. North American-headquartered companies spent 4.8% of sales on R&D, flat compared with 2006, while Japanese-headquartered companies spent 3.6% of sales, down .1% from last year and European-headquartered companies spent 3.6%, up .2%.
Booz & Company estimates that the Global Innovation 1000 accounts for 80% of 2007 total global corporate R&D spending of $613 billion.
R&D spending growth accelerated in 8 of 10 industries examined, with health and consumer showing slower growth rates this year. The software and Internet industry had the highest level of R&D spending as a percentage of sales (13.6%), followed by healthcare (13.4%), and computers and electronics (7.0%). The chemicals and energy sector had the lowest R&D spending level, at just one percent.
Booz & Company Global Innovation 1000: Study Methodology
Booz & Company identified the 1,000 public companies around the world that spent the most on research and development in 2007 (companies for which public data on R&D spending was available). Subsidiaries that were more than 50% owned by a single corporate parent were excluded because their financial results were included in the parent company’s reporting.
Booz & Company analyzed key financial metrics for each of the top 1,000 companies for 2001 through 2007 — sales, gross profit, operating profit, net profit, R&D expenditures and market capitalization. All expenditure figures were translated into U.S. dollars according to the average exchange rate for the year. In addition, total shareholder return was gathered and adjusted for each company’s corresponding local market total shareholder return.
Each company was coded into one of nine industry sectors (or “other”) according to Bloomberg’s industry designations, and into one of five regional designations according to reported headquarters locations for each company. To enable meaningful comparisons across industries on R&D spending levels, Booz & Company indexed the R&D spending level and financial performance metrics for each company against the median R&D spending level for that industry.
To understand the global distribution of R&D spend, the factors that drive it and the affect on performance, Booz & Company researched a subset of companies on this year’s Global Innovation 1000 list that spent a total of $351 billion on R&D in 2007, and represent 71% of the Innovation 1000 and 57% of all global private sector R&D activity. Supplemental interviews were conducted with a select group of leaders.