Research & Development spending of top firms flat at $680 billion

07 November 2016 Consultancy.uk

Total innovation spending of the globe’s 1,000 largest R&D spenders has remained stable at $680 billion. While currency fluctuations are partly responsible for stagnant growth, innovation spending in software, internet and healthcare continued to see strong gains. The UK houses 37 of the globe’s innovation elite.

New research by Strategy&, a global management consultancy, looks at the innovation spending of the 1,000 public companies around the world that spent the most on Research & Development (R&D) during the last fiscal year (‘Global Innovation 1000’). The study finds that, after five consecutive years of growth, including 5% last year, total spending was flat in 2016, at $680 billion. 

Global Innovation 1000 R&D spending

However, in terms of R&D intensity the market has seen advancement. As the total revenue of the 1,000 assessed corporates fell by 11.8% to around $16 trillion, primarily due to a 31% decline in revenue in the Chemicals & Energy industry, the R&D intensity climbed to its all-time high of 4.2%, last seen in 2005.

Regional differences

Research & Development spending has seen ups and downs in terms of regional spends in recent years. North American companies have, on average, increased their R&D spend by 8%. Europe, while trending upwards between 2013 and 2015, saw a decline of -9% between 2015 and 2016. Japan has seen a downwards trend in spending for years, and faced a decline of -8% between 2015 and 2016, while Chinese spending on R&D has boomed 19%, on a relatively small base.

R&D spending by region

In terms of R&D spending by industry, considerable change has taken place over the past decade. Computing and electronics climbed steadily until 2008, saw a sharp decline, before growing again until 2013, before declining slightly since. Healthcare has, besides small declines, grown steadily in the period. Automotive, hard hit by the financial crisis, again saw growth until last year, before declining in 2016. Software and internet however, has seen momentous growth since humble beginnings in 2011, surpassing Industrials in 2015.

R&D spending by Top 5 industries

The firm’s projection for the future sees healthcare continue to climb, particularly in North America, taking the top spot by 2018 at around $165 billion in investment. Software and Internet too continues on its strong growth trajectory, taking third spot by 2018 at around $129 billion in annual investment. Automotive will stagnate in terms of spending, while industrials is set to climb slightly.

From products to software and services

Looking ahead, Strategy& says that companies will increasingly shift the majority of their R&D spending away from product-based offerings to software and service offerings. The average allocation of R&D spending for software and services increased from 54% to 59% between 2010 and 2015 and is expected to grow to 63% by 2020. Meanwhile, the average allocation of R&D spending dedicated to product-based offerings fell to 41% (from 46% in 2010), and is expected to fall to 37% by 2020 (an overall decrease of 19% this decade).

R&D from product offerings to software and services

The need to stay competitive is the top reason why companies cited a shift in their R&D budgets towards software and services, and for good reason – according to the study, companies who reported faster revenue growth relative to key competitors allocated 25% more of their R&D budgets to software offerings than companies who reported slower revenue growth. The other two reasons cited in the top three are the need to increase revenue generation/growth and the wish to keep up with customer expectations.

Reflecting on the trend, Barry Jaruzelski from Strategy& says, “Many of the world’s major innovators are in the midst of a transformational journey mostly driven by changing – and rising – customer expectations. The shift is also being driven by the supercharged pace of improvement in what software can do, including the increasing use of embedded software and sensors in products, the ability to reliably and inexpensively connect products, customers and manufacturers via the Internet of Things (IoT), and the availability of cloud-based data storage.”

Top 5 drivers of change in R&D allocation

In a bid to bolster the software and services capabilities, the globe’s R&D giants are actively buying their way into the segments. Among companies that made an acquisition during the past five years, the vast majority – 71%– were made to enhance capabilities in software (33%) or services (38%). In addition, corporates are applying all kinds of other means to grow their skills in the realm, including the application of open innovation, corporate venturing and supporting incubator programmes.

M&A in software and services

Regionally, companies in North America are making the strongest shift to software offerings – from 15% of total R&D spending in 2010 to 24% in 2020. The shift is the main driver why, for the first time in the study’s history, the number of Global Innovation 1000 companies headquartered in the US grew, up 9.5% year over year. Asia remains across the board the most product-centric region, with 44% of R&D allocated to product offerings in 2010, only falling to 40% in 2020. The automotive and industrial sectors are making the most aggressive push towards developing new software offerings.

R&D spending in the UK

UK companies invested £16.5 billion in research and development in the last fiscal year, accounting for 4% of the global total and ranking as the eighth highest investment by country. The healthcare industry is leading the way in the UK, investing nearly half (48%) of total R&D spend. The automotive and consumer industries complete the top three for R&D spending by UK companies, investing 18% and 8% of the total respectively.

Number of companies by region

Overall 37 UK-headquartered companies made the Innovation 1000 list this year, spending on average 2.9% of revenue on R&D, up slightly from 2.3% the year before, but considerably lower than the global average of 4.2%. “Innovation is an essential component of competitive advantage and UK business leaders clearly recognise the importance of R&D to their future success. Brexit has only made R&D investment more pertinent in the UK. It’s vital that companies continue investing and remain agile to exploit new opportunities”, says Mark Couttie, a Strategy& partner based in London.

Related: R&D and innovation spend increasingly moving to China.

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