This is part of IEEE Spectrum's special R&D report: They Might Be Giants: Seeds of a Tech Turnaround.
Free market economies cycle up and down. The bulls and bears come and go. But high-tech companies that plan to be around for a while must invest steadily in research and development, or risk being swept away in the next wave of innovation. That wave is rolling in partly on the strength of the five blockbuster technologies explored in this special report, each of which IEEE Spectrum expects will give birth to lucrative new markets or accelerate the growth of old ones within the next five years.
"It's a life-and-death struggle in the high-tech industry," said iconoclastic economist and perennial Nobel Prize contender William J. Baumol in a recent interview with IEEE Spectrum. To survive, companies must spend ever-larger sums of money developing materials, devices, systems, methods, and prototypes in light of the knowledge gained through basic research primarily funded by governments and, increasingly, by firms themselves.
In other words: innovate or capitulate. That Hobson's choice has not only driven the world's Top 100 R&D Spenders to pump more than US $215 billion into research and development departments last year—it is the engine driving the growth miracle of capitalism, as Baumol calls it in the most recent of his 40 books, The Free-Market Innovation Machine.
According to Spectrum 's first annual R&D survey [see table, PDF], the world's Top 100 Spenders increased R&D expenditures by an average of 5.25 percent in 2001, despite massive turmoil in the telecommunications, computer, and semiconductor sectors. Compared to the year before, 43 of the top 100 increased R&D spending by an average of almost 22 percent, while 53 cut spending an average of 8 percent (and of those, 12 trimmed R&D outlays by less than 2 percent). Predictably, most of the big drops were in the telecom sector, including beleaguered Lucent Technologies [ranked (17) among the top 100] and Nortel Networks (19), which slashed R&D outlays by 30 and 35 percent, respectively [see graph "R&D Bulls and Bears,"below].
But even in depressed sectors, companies went on investing, with some posting surprisingly aggressive increases. JDS Uniphase (91) bucked the R&D slide in the telecommunications equipment sector by boosting its R&D spending over 50 percent. Chipmakers LSI Logic (96), Sun Microsystems (42), and IBM (5) all raised their R&D spending by more than 20 percent over the prior year. Several companies tied to the corporate networking and database markets also increased spending substantially, including EMC (77), which upped R&D spending 18.6 percent; Cisco Systems (8), up 17.2 percent; Microsoft (12), up 16 percent; and Oracle (66), up 12.7 percent. (Note: figures provided by Standard and Poor's are historical and do not included restated data.)
The continuous rise in corporate R&D spending through boom and bust cycles reflects a novel observation of Baumol's, which he describes in his book as a ratchet effect. He notes that R&D spending can be expected to surge from time to time, as it did during the mid-1990s, but once the new level is reached, "the ratchet—enforced by the competitive market—prevents a retreat to the previous lower level." Amid a serious economic downturn, the ratchet might slip a bit, but the mechanism nonetheless "accounts for the extraordinary growth record of free-enterprise economies and differentiates them from all other known economic forms, with ever-growing R&D expenditure norms leading to ever more rapid growth."
Competition not only forces companies to "run as fast as they can in the innovation race just to keep up with the others," it also compels them to integrate their research, production, marketing, and sales units into a single innovation machine, says Baumol. And when marketing, sales, product development, and research departments join in setting and executing the R&D agenda, market potential, as opposed to scientific curiosity, is the guiding light.