R&D spend rises 10% in 2007 - well over the compound growth rate of 6.7% since 1999
Companies which invest more than 60% of R&D spending abroad perform better
Sharp increase in R&D spending in the Far East
Only two British companies in the top 20
London, 21 October , 2008 – Aggressive investment in research and development is a clear global trend among the 1000 public companies which spend the most on R&D, according to Booz & Company’s fourth annual analysis published today. There was a 10% increase in R&D spend to US$492 billion on research and development in 2007, well over the compound growth rate of 6.7%.
For the first time, Booz & Company analysed a subset of 184 of the top R&D spenders to understand geographic distribution of R&D spending. This showed that India and China were the top net importers of R&D spending from other countries. Further, companies headquartered in India and China, while only contributing just 1 percent of the Global Innovation 1000’s total spend, increased their R&D spending by more than 22 percent in 2007.
Out of the 1000 companies analysed, only two British companies, GlaxoSmithKline and Astra Zeneca, both in the health sector, were among the top 20.
John Potter, partner at Booz and Company, commented: “Investment in R&D in the UK is crucial for the country to remain competitive, and the Government continues to track this with its annual scorecard. Companies that look offshore are no longer just focused on lowering their labour 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. 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.”
R&D spend goes overseas
The majority of the 1000 companies (91%) conducted R&D activities in countries beyond that in which they are headquartered. Those companies which spent more than 60% of their R&D budget outside their home countries over the past three years appeared to enjoy better performance in total shareholder return, operating margin, market cap growth and return on assets.
On average, a global multinational corporation spends only 45% of its R&D budget in its home country. The majority is invested in other countries to make the most of specialised R&D skills, proximity to new markets and local insights.
First time analysis of geographic distribution of R&D dollars
For the first time this year Booz & Company carried out an in-depth examination of the geographic distribution of R&D dollars within a subset of 184 of the top spenders among the Global Innovation 1000 companies, which represent $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. 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:
India and China increased their absolute R&D spending by 22%, outpacing the worldwide compound annual growth rate of 6.7% since 1999. 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 95% of the Innovation 1000 spending, a proportion unchanged from last year.
China and India were the top net “importers” of R&D spending, receiving $24.7 billion and $12.9 billion respectively from the 184 companies in the subset analysis, while spending far less on R&D abroad.
Low labour costs are not the main reason to move R&D abroad. The Booz & Company analysis found that lower engineering labour rates explain only a third of moves to site R&D facilities overseas, as labour costs soar in many low-cost countries.
A dispersed global R&D network is less effective. Companies that operated a multi-geography network of fewer and larger R&D facilities performed 20% better on three-year operating income growth and total shareholder return, and 40 percent better on three-year market-cap growth.
Two-thirds of R&D spending was concentrated in just three industries in 2007: computing and electronics (29%), health (22%), and automotive (16%).
For many countries, the flow of innovation monies goes two ways. 40% of the money spent on R&D in the US is spent by companies headquartered elsewhere. Other countries with significant two-way movement of R&D dollars include Germany, the UK, France and Japan.
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.
Booz & Company estimates that the Global Innovation 1000 accounts for 80% of the 2007 total global corporate R&D spending of $613 billion.
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 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.
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 analysed 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 capitalisation. All expenditure figures were translated into US 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 9 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.