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 / Winter 2006 / Issue 45(originally published by Booz & Company)


Smart Spenders: The Global Innovation 1000

Booz Allen Hamilton’s annual study of the world’s 1,000 largest corporate R&D budgets uncovers a small group of high-leverage innovators who outperform their industries.

What does Dentsply International, a midsized manufacturer of dental products in York, Penn., have in common with Kobe Steel, a Japanese metals producer? What qualities are shared by Cadbury Schweppes, the European candy and beverage company; Tata Motors, the up-and-coming Indian automaker; and Google, the superstar of Silicon Valley? What links Caterpillar, the leviathan of earthmoving equipment, with Apple, the nimble conjurer of the iPod Nano, and Adidas, the German purveyor of sportswear? What does Toyota have in common with Christian Dior?

Photograph by Chris Callis

The answer: All these companies spend less than their competitors on research and development, yet outpace their industries across a wide range of performance metrics. They are among the world’s “high-leverage innovators,” a select subset of the Booz Allen Hamilton Global Innovation 1000, our annual roster of companies that spend the most on research and development worldwide. As different as they are from one another, these 94 smart spenders have one thing in common. They get more bang for their R&D buck than their peers, even their highly innovative peers. And they have managed to do so consistently over a five-year period. They may not develop the highest number of new products or services, but they consistently reap the greatest financial reward from every dollar they invest in R&D.

Now in its second year, the Global Innovation 1000 study is the most comprehensive effort to date to assess the influence of R&D on corporate performance. Last year, our in-depth analysis — studying the 1,000 companies that reported the most spending on research and development around the world in 2004 — demonstrated that there is no simple relationship between the level of R&D spending and corporate performance. This year, the data reinforced that conclusion and extended it, with a new understanding of innovation practices and additional metrics (such as the number and quality of patents). Among the specific findings:

  • Deep pockets can be dry wells. Analysis of the 2005 Global Innovation 1000 confirms the major finding from our initial study last year: Money simply cannot buy effective innovation. There are no significant statistical relationships between R&D spending and the primary measures of financial or corporate success: sales and earnings growth, gross and operating profitability, market capitalization growth, and total shareholder returns. Gross profits as a percentage of sales is the single performance variable with a statistical relationship to R&D spending.
  • Less than 10 percent of companies are high-leverage innovators. Compared with others in their industries, only 94 of the companies in the Global Innovation 1000 produced significantly better performance per R&D dollar over a sustained period.
  • Companies are getting better at squeezing benefits from R&D spending. R&D spending by the Global Innovation 1000 rose last year by more than $20 billion, but revenues rose more.
  • Bigger can be better, even if it doesn’t boost breakthroughs. Scale provides advantages to R&D spenders. For the largest 500 companies, ranked by revenue and indexed by industry, median R&D spending was only 3.5 percent of sales in 2005, compared with 7.6 percent for the 500 smallest firms.
  • Patents generally don’t drive profits. Boosting R&D spending can increase the number of patents that a company controls, but there is no statistical relationship between the number or even the quality of patents and overall financial performance.
  • Masters of the innovation value chain have an edge. The high-leverage innovators and the companies with best overall performance distinguish themselves not by the money they spend, but by the capabilities they demonstrate in ideation, project selection, development, or commercialization.

Conventional wisdom often seems to view R&D as a predictable black box that automatically translates today’s innovation investments into tomorrow’s profits, even if nobody quite understands how it works. The principal findings from our study — both this year and last year — may undermine some people’s faith in innovation as a financial savior; however, they comport with the real-world experience of most corporate decision makers, as well as with the lessons of business history. Innovation often does lead to higher performance, but the process isn’t automatic. Many companies’ R&D efforts are unfocused. Money is wasted “reinventing wheels” that others have already rolled out. Good ideas get stuck in developmental bottlenecks. And promising innovations never get to market because of flawed understanding of customers’ needs, and poor marketing and investment planning.

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  1. Kevin Dehoff and Vikas Sehgal, “Innovators without Borders,” s+b, Autumn 2006: A study by Booz Allen Hamilton and India’s National Association of Software and Service Companies (NASSCOM) on the expanding geographic footprint of innovation sourcing. Click here.
  2. Yves Doz, Keeley Wilson, Steven Veldhoen, Thomas Goldbrunner, and Georg Altman, “Innovation: Is Global the Way Forward?” A joint study by Booz Allen Hamilton and INSEAD, 2006: Global companies’ current and future innovation and R&D dispersion. Click here.
  3. Jules Duga and Tim Studt, “The State of Global R&D: 2005 Global R&D Report,” R&D Magazine, September 2005: Battelle Institute study shows how government and business R&D spending has spread around the globe.
  4. Barry Jaruzelski, Kevin Dehoff, and Rakesh Bordia, “Money Isn’t Everything: The Booz Allen Hamilton Global Innovation 1000,” s+b, Winter 2005: The first Global Innovation 1000 report. Click here.
  5. Jonathan Schwartz, “The Five Founding Principles That Drive Innovation,” Financial Times, September 12, 2006: Sun Microsystems’ chief executive officer on managing the process of innovation.
  6. Manufacturing Extension Partnership overview, National Institute of Standards and Technology (NIST): Information about NIST’s outreach program for small and medium-sized manufacturers. Click here.
  7. St. Jude Children’s Research Hospital, 2005 Annual Report: Research highlights, plus organizational and financial information. Click here.
  8. The 2006 Patent Scorecard: ipIQ, a technology analysis firm that produces the world’s most comprehensive patent database, from which data was drawn for the Global Innovation 1000 analyses, ranks corporate innovation within 15 industries by patent quality, technological strength, and breadth of impact. Click here.
  9. “The 2005 R&D Scoreboard: The Top 750 U.K. and 1000 Global Companies by R&D,”: This study from the U.K. Department of Trade and Industry provides detailed data and analysis and claims a link between R&D and financial performance that our study did not detect. Click here.
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