ohiobeekeepers | Small Business Ideas

Widely viewed as the key to corporate success, innovation has become a constant topic of discussion in business. Sophisticated investors need to understand the relationship between the R&D investment and corporate success, so that they can properly appraise investment opportunities. For example, they may find an under-performing company and be able to turn it around by injecting R&D funds – or so it would seem. It is not quite that simple.

R&D spending and growth

Received wisdom had been that improved company performance automatically followed increased R&D spending, but no research supported this. Throwing money into R&D does not guarantee positive results. Rather, for positive returns from increased R&D spending, more than cash is required. The company has to effectively exploit the technology outcomes of the R&D.

Some of the biggest innovation successes in recent years were not produced with big budgets, and extra resources could actually impede effective innovation. Free-issue resources tend to get squandered, and when cash is plentiful, it can get wasted too.

Threshold of R&D spending

Although R&D spending and corporate success are not closely coupled, analysis has shown that a threshold exists. Performance suffered if the company fell into the lower 10% of R&D spending in its peer group. However, there was no serious impact on the performance if the company was in the middle or the top 10% of the peer group. Interestingly, this might also suggest that there is an upper threshold.

So, it is not about how much a company spends on its R&D. Rather, it is about how the company goes about utilising what it possesses. These are: the tools, the processes, the culture, the organisation, and the shape of its product portfolio.

High-leverage innovation

Studies have identified companies that consistently outperformed their rivals even while spending less on R&D (we talked earlier about an upper threshold). These companies were significantly different from their competitors in several aspects. What they were doing was utilising a model for high-leverage innovation.

Another misconception is the role of patents as an indicator of the success of innovation. The number of patents was closely linked to R&D spending, but shareholder returns, profitability and company growth were not linked to patent registration rates. Read the rest of this entry »