R&D spending returns to pre-recession levels, finds Booz and Company Global Innovation 1000 study

This eighth annual analysis of corporate R&D spending was released today by global management consulting firm Booz & Company.

The study examined the 1,000 public companies that spent the most on research and development in 2011 and found that innovation spending reached an all-time high of $603bn during the year, up from $550bn in 2010. This is an increase of 9.6% over 2010 and is the second consecutive year of growth. This rebound comes after spending dropped 3.5% between 2008 and 2009 during the height of the recession.

"Saudi Arabia's Saudi Basic Industries Corp. (SABIC) is the only company headquartered in the GCC to make it into the Global Innovation 1000 list since 2008," said Chadi Moujaes, Partner with Booz & Company. "This year, SABIC ranked 416th out of the 1,000-strong list of innovative companies and is one of the world's top spenders in R&D, outperforming many of its competitors. Moreover, the company's ranking this year is an improvement over last year's 471 position. Total R&D spend by SABIC in 2011 was $219m, a 26% increase from $174m in 2010."

Overall, chemical and energy companies in the Global Innovation 1000 list maintained their R&D spend during the course of the year. Likewise, SABIC's R&D intensity remained at 0.43% for a second consecutive year.

Booz & Company also surveyed nearly 700 innovation leaders from companies worldwide to determine which companies those leaders see as the most innovative companies in the world. Apple, Google, and 3M topped the list for the third consecutive year. The most innovative companies are seldom the biggest spenders, the study confirms. When compared to the 10 companies that spent the most on R&D, the Top 10 most innovative companies outperformed across key financial metrics, including revenue growth, market cap growth, and profit as a percentage of revenue.

"Consistent with our study findings from previous years, there is no long-term correlation between the amount spent on innovation and an organization's overall financial success," said Barry Jaruzelski, senior partner at Booz & Company and global leader of the Engineered Products & Services practice. He also noted that "what really matters is not the amount spent, but how those R&D funds are invested in talent, process, and tools."

"R&D spending does not ensure increased financial gains, nor does it guarantee innovation success," added John Loehr, Partner at Booz & Company and global leader of the firm's Innovation practice. "Case in point: Apple, Google, and 3M ranked 53rd, 26th, and 86th, respectively, in R&D spending among the Global Innovation 1000 companies."

Other key findings from this year's Global Innovation 1000 study:
· The three industries with the greatest R&D investment were computing and electronics, health, and automotive (28%, 21%, and 16% of the total Global Innovation 1000 spend, respectively).
· Two-thirds of the $53bn increase in R&D spending between 2010 and 2011 came from the computing and electronics, automotive, and industrials sectors.
· 75% of companies increased their R&D spending from the previous year in 2011, up from 68% in 2010.
· This year Amazon joined the top 10 "Most Innovative" companies pushing out Facebook. For the third straight year Samsung rose in rank on the list (to fourth place, up from seventh place last year), and Apple, Google, and 3M took the top three positions, respectively, also for the third consecutive year.
· Regionally, companies based in North America grew their R&D spending by 9.7%—just above the global average of 9.6%—while Europe and Japan grew theirs at below-average rates of 5.4% and 2.4%, respectively.
· India- and China-based firms again increased R&D investment at the highest rate overall across regions (27% on average), although from a small R&D spending base.

"In addition to the R&D spending data trend analysis, this year's study also examined the early stages of innovation, specifically looking at the tools, processes, and mechanisms companies use to generate ideas and how they take those ideas to market", said Rasheed El Tayeb, Principal with Booz & Company.

Nearly half of those surveyed said their organizations were just average or marginally effective at generating new ideas and converting them into potential future products. Meanwhile, the 25% of companies that reported being "highly effective" at both idea generation and conversion outperformed their peers on three important financial measures—revenue, market cap growth, and EBITDA as a percentage of revenue.

Although innovation tools like social network data mining, crowdsourcing, and seed funding have been much hyped in recent years, companies themselves reported a much greater focus on traditional idea-generation tools. The most common mechanism for developing new ideas, by a substantial margin, was direct observation of customers, which was ranked number one by 42% of all respondents. Traditional market research was ranked second, with 31% of respondents ranking it among their top five mechanisms.

However, companies in more consumer-oriented industries, including software and internet, computing and electronics, and consumer goods, were twice as likely to employ social media in their search for new ideas than were companies in more industrial sectors such as automotive, industrials, aerospace, and chemicals and energy, where such methods seem to have less efficacy.

"Companies' reliance on traditional sources for the majority of new ideas, despite the attention paid in recent years to more open innovation processes, is one of the more interesting discoveries from this year's study," said Richard Holman, partner at Booz & Company. "The key takeaway for businesses is that the most successful innovators in all industries employ ideation practices that are well aligned with their innovation strategies."