The quest for innovation has long been a faith-based initiative: Spend more, and profit will come. Are you losing out to nimbler competitors? On the high-cost end of globalization? Is your sales growth flattening? Are your margins narrowing? Want to prove to Wall Street you’re serious about growth? Don’t worry; just increase the R&D budget. New products or services will emerge that make the difference — won’t they?
Not so fast. The results of our recent study of the Booz Allen Hamilton Global Innovation 1000 — the 1,000 publicly held companies from around the world that spent the most on research and development in 2004 — may provoke a crisis of faith. The study, which we believe is the most comprehensive effort to date to assess the influence of R&D on corporate performance, suggests that nonmonetary factors may be the most important drivers of a company’s return on innovation investment (ROI2). The major findings:
Money doesn’t buy results. There is no relationship between R&D spending and the primary measures of economic or corporate success, such as growth, enterprise profitability, and shareholder return.
Size matters. Scale leads to advantage. Larger organizations can spend a smaller proportion of revenue on R&D than can smaller organizations, and take no discernible performance hit.
You can be too rich or too thin. Spending more does not necessarily help, but spending too little will hurt.
There isn’t clarity on how much is enough. Instead of clustering into any coherent pattern, R&D budget levels vary substantially, even within industries. This suggests that no single approach to spending money on innovation development is universally recognized as the most effective strategy.
It’s the process, not the pocketbook. Superior results, in most cases, seem to be a function of the quality of an organization’s innovation process — the bets it makes and how it pursues them — rather than the magnitude of its innovation spending.
Collaboration is key. The link between spending and performance tends to be strongest in those areas most under the control of the R&D silo, such as product design, and weakest in those areas where cross-functional collaboration is most difficult, such as commercialization.
These findings conjure up familiar images of frustration. Hardworking R&D teams invest time and money in the wrong projects; manufacturing, marketing, and sales drop the ball on winning products and services; and senior executives and policymakers simply throw more money at research and development in the mistaken belief that it will make a difference. When it comes to innovation investment, it appears that in many cases, less may be more.
Innovation’s New Context
The myth that higher R&D spend translates into competitive advantage has been around for decades, but it appears to be particularly strong now. Pick up any business magazine or newspaper. You’ll find ample evidence of the belief in the effectiveness of larger budgets, for both corporate and national competitiveness:
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“U.S. spending on R&D will also have to increase if the country wants to remain technologically dominant.” —Fortune, July 2005
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“We need at NEC to increase our R&D spending by as much as 50 percent to keep ahead of the competition.” —NEC Corporation (#41 on the list of 1000) senior vice president, quoted in The Age, July 2005
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“The European Commission will today appeal to E.U. countries to increase spending on research and development, or face being out-paced by competitors such as China.” —Financial Times, July 2005
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“[Yahoo] spends as heavily on product development and R&D as Google and Microsoft…falling behind in this arms race would spell big trouble.” —Fortune, August 2005
