With the economic recession now firmly in the rear view mirror, large, multi-national companies around the world are placing riskier bets when it comes to investing in innovation.

Business leaders at some of the largest companies in the world say the percentage of research and development dollars they allocate to "breakthrough" or "radical" innovation will increase by roughly 50 percent to 22 percent of total R&D spending during the next decade, according to a study from consulting group Strategy& (formerly Booz & Company). The study, called the Global Innovation 1000, surveyed more than 500 business leaders at 467 companies around the world.

In the immediate wake of the economic recession, companies de-risked their R&D spending by shifting to more conservative projects, according to Barry Jaruzelski, a senior partner at Strategy&.

"They needed to have a sure bet, so that would often mean something that was shorter term and more incremental, even if they were spending--in total--equivalent amounts of money on R&D," he says.

Now, however, businesses are re-adjusting their R&D focus to make higher-risk bets, according to the study.

"They're shifting the portfolio back to at least what it was pre-recession, and you can argue maybe even being a little bolder," Jaruzelski says. "What this tells us is that the competitive bar is going up--to be bolder--or they're more confident in placing riskier bets."

Another significant change to innovation spending has to do with the type of research and development companies plan to focus on in the future. While slightly more than half of all R&D spending today goes to products, (52 percent), business leaders say they expect to shift the majority of their R&D dollars to focus on services during the next decade.

"More and more R&D is being spent on things that create service revenues as opposed to necessarily a discrete product from a hardware point of view," Jaruzelski says.

"Services--whether they be actual labor services or something that's a cloud service--[are] much more likely to have a business model that's more like an annuity stream, as opposed to a single purchase event."

One example Jaruzelski cites is Michigan-based automotive company Visteon, which has traditionally operated as an auto parts company but is now focusing more on services related to Internet-connected cars, such as wireless charging and wireless communication. 

"It used to be that you bought a car with some sort of extended service contract," he says. "Now, you can buy OnStar."

While total dollars spent by the 1,000 companies that dedicate the most money to R&D has been relatively flat between 2013 and 2014, one of the long-term findings of Strategy&'s survey--now in its tenth year--is that there is no correlation between R&D spending and innovation ranking, or R&D spending and financial performance. 

"It's not about how much money you throw at the problem," Jaruzelski says. "If it was that easy, every startup would be dead on arrival because established incumbents would always be able to outspend [them]. Frankly, we could even see situations where having more money seemed to make things worse, not better."

Apple, considered by many to be the most innovative company in the world, has never been in the top 20 of the computer and electronics industry for R&D spending, according to Jaruzelski, who also points to the pharmaceutical industry as an example of a sector that spends vast amounts of money on innovation with little results.

"Pharma is always heavily represented in top 10 spender lists," Jaruzelski says, "but no pharma company has ever appeared on the most innovative list."

 

Published on: Dec 2, 2014