R&D Spending Today Could Hold Key to Tomorrow's Recovery
A terrific piece by the Wall Street Journalâ''s Justin Scheck and Paul Glader shows that the recession hasnâ''t yet led companies to pare their spending on R&D. It hardly dipped in the fourth quarter, compared to a year before, even though revenues fell by 7.7 percent.
The article suggests that companies may have learned, the hard way, that R&D cuts today will doom product lineups tomorrow. Consider how Apple and Motorola reacted to the last dot-com bust:
Apple boosted R&D spending 42 percent between 1999 and 2002, even as revenue fell more than 6 percent. Those investments helped spawn the iPod music player, introduced during the last recession in October 2001, and the iTunes music store, which debuted in 2003. Typically, investments in R&D take two to three years to pay off.
Motorola slashed R&D spending 13 percent in 2002. The company scored big with its super-thin RAZR cell phone in 2004, but failed to develop equally successful follow-up products. Spending on R&D has rebounded, but more slowly than revenue, and Motorola's market share and stock price have withered.
The Journal also cites General Electric as vowing not to repeat the mistake it made in the last recession, when it skimped on light-emitting diodes, a technology thatâ''s now competing with its incandescent bulbs. Hereâ''s the money quote, from Mark Little, GE's senior vice president and director of global research: â''It's fair to say our competitors have put more money into the lighting business, and it shows.â''
The article does note that the health of R&D may only be apparent, because the recession began to bite only months ago, whereas research projects last for years. A drug company would have to be sorely strapped to shut down a trial thatâ''s halfway through its two-year run, but it might well decline to start new trials. Thatâ''s why itâ''ll be some time before we know for sure how the recession is affecting R&D spending.
Where that spending goes is another question. As the Journal notes, and as Spectrum reported in latest annual R&D report, ever more research dollars are being funneled to India and China. Such outsourcing canâ''t be a mere reaction to the recession, because itâ''s been going on for years.
One more thing: correlation does not prove causation. Successful companies may dominate R&D not because itâ''s the key to their success but because they are the ones that can best afford it. A study a few years ago by consulting firm Booz Allen Hamilton found that though the top R&D spenders didnâ''t outperform other firms in their sectors, the bottom spenders did underperform. (Here was our take on that study.)
Glader explores this angle in a follow-on comment in Tuesdayâ''s Journal. He cites William Duggan of the Columbia Business School, who argues that marketing and operations budgets are more closely tied to success than are R&D budgets, citing Russiaâ''s example to prove that massive investment in research neednâ''t bear fruit.