Capital goods sales leader General Electric Co. increased R&D spending by 16.2 percent, but it remains at the bottom of its sector for R&D intensity at just 1.6 percent. In fact, GE's R&D intensity is at the bottom for the Top 100 overall along with Nestle SA and Deutsche Telekom. Such a low R&D intensity, though, isn't as shocking as it first appears. R&D intensity can vary widely among a firm's divisions, especially in conglomerates like GE. For example, GE is in business lines like entertainment and financing that have little or no R&D spending, but it also builds aircraft engines, a business in which it makes significant R&D investments.

R&D growth for capital goods over the past five years has been a better than average 41 percent, nine points higher than sales growth. As a result, the sector increased its share of the Top 100 from 9 percent to 10 percent.

Also increasing its share of the Top 100 is the consumer durables and apparel sector. Most of this sector's firms in the Top 100 are consumer electronics or film companies; no apparel firms made the list. The sector as a whole increased its spending by 11.4 percent in the past year. Four firms increased R&D spending—Kodak, Matsushita, Sanyo, and Sharp—while three—Fuji, Philips, and Sony—decreased it. Over the five-year period, 2000 to 2004, the sector's R&D spending grew by a better than average 33 percent, in line with sales growth.

But even robust sales growth does not necessarily translate into more R&D funding. The materials sector, which includes chemical companies like BASF, Bayer, and DuPont, decreased its year-over-year R&D spending in 2004 despite sales growth of 29 percent. In this sector, every single firm's ranking in the Top 100 slipped at least one place in 2004. Some of this slippage was due to drops in spending, like Bayer Group's 12.7 percent cut, but in other cases spending increases, including those for BASF AG, did not keep up with those of other firms. Over the five-year period, the sector's R&D intensity dropped from 5.6 percent to just 4.4 percent.

On the other end of the spectrum, the software and services sector had the highest R&D intensity, 14.7 percent. The sector had only three firms in the Top 100—Microsoft, Oracle, and SAP—all packaged-software firms. Microsoft dominates the sector, accounting for 69 percent of its R&D, up from 59 percent five years ago. However, Microsoft dropped to No. 7 on the overall leaderboard after capturing the top spot for the first time in 2003.

Microsoft's R&D spending decreased 20.5 percent in 2004 despite an increase in R&D employees. According to its U.S. Securities and Exchange Commission filings, the decrease was "due to lower stock-based compensation expense." As we discussed in detail last year, in 2003 the company began offering its employees stock-based compensation in lieu of options. This affected its R&D accounting significantly, because almost half of Microsoft's employees work on R&D.

Unlike software and services, telecom services' R&D has not kept up with sales growth. The sector has just three firms in the Top 100—Deutsche Telekom, Nippon Telegraph & Telephone, and DoCoMo. R&D spending dropped year over year for the sector in 2004. Although spending fared better from 2000 to 2004, growing 16 percent, it didn't keep up with sales growth of more than 50 percent. As a result, the sector has the lowest R&D intensity, at 2.1 percent. Also worth noting is that, with the exception of Deutsche Telekom, no U.S. or European local telephone service providers, long-distance carriers, or cellular firms rank in the Top 100.