Strategy&: Innovation spending grows 5% to 680 billion

R&D spending by the largest companies around the world has increased 5.1% since last year to reach $680 billion, research by Strategy& shows. Particularly computer and electronics, healthcare, auto, and software and internet are spending big. The report further highlights however that both spending ‘too much’ or ‘too little’ may be detrimental to performance, and that statistical relationships between R&D spending and performance metrics are not clear.

For 11 years Strategy&, the strategy consulting business of Big Four firm PwC, has explored the innovation landscape for its acclaimed ‘2015 Global Innovation 1000: Innovation’s New World Order’ report. The report explores the innovation trend of the 1,000 largest publicly listed corporate R&D (research & development) spenders. To develop the trend, the consulting firm researched 207 companies headquartered in 23 countries, finding their R&D footprint to consist of 2,041 R&D sites spanning more than 60 countries. The firm further engaged in an online survey of 369 innovation leaders around the world.

Growing R&D trend
The research finds that investment in R&D spending has accelerated in growth, up from $647 billion in 2014 to hit $680 billion in 2015, which represents a 5.4% CAGR. The increase to above 5% is a considerable gain on 2013 and 2014 when the rate stood at 3.8% and 1.4% respectively, and comes in line with the 10-year CAGR of 5.4% that has seen R&D spending up 70% from $400 billion in 2005.

Spending by sector
Investment in R&D differs considerably between different industries. The largest spenders on R&D are computing and electronics and healthcare, at $166 billion and $145 billion respectively. In the past year however, computing and electronics has seen a -0.7% decline, while healthcare has increased by 6% - closing the gap between the forerunners. The consultancy’s prediction is that healthcare will outspend computing and electronics by 2019.

The software and internet segment has enjoyed massive growth in recent years, more than doubling since 2011 to spend $76 billion in 2015 – surpassing industrial to become the fourth largest spender.

R&D intensity
The intensity of R&D activity – as a % of revenue spent on R&D – has increased slightly this year over 2014. This is owed for a large part to a 1% decrease in revenue across industries, particularly affecting the chemicals and energy sector from falling oil prices. R&D spending tends to be ring-fenced in the medium term, resulting in increased activity. The long term trend, from 2005, has seen a declining CAGR of -1.2%, averaging out spending as % of revenue, to 3.7%.

Effective spend
The report highlights that while companies are spending considerable amounts on R&D, spending ‘too much’ does not necessarily produce consistently better outcomes for the companies. However, particularly spending too little is correlated with poor performance in operating profit. According to the Strategy&, operating profit growth is better served by those spending in the middle indexed 80% compared to the top or bottom 10%.

The firm also notes that R&D spending as such does not guarantee success in many of the major metrics used to determine business success, with no statistical relationship between R&D spend and sales growth, profit growth, operating profit growth, operating margin, net profit growth, net margin, market cap growth and total shareholder return.