Newswise — It stands to reason that companies invest in research and development to beat their rivals and those that spend the most money ought to do the best. But it isn't true.
This year's IEEE Spectrum list of the top R&D corporate spenders shows not the slightest connection between a company's spending and its rank within its industrial sector. The same goes for the lists for the past six years, all of which were compiled for Spectrum by Standard & Poor's.
Evidence that spending isn't everything comes from Toyota, which last year passed General Motors to become the world's top-selling automaker. Neither now nor at any time in the past six years has Toyota spent more than GM on R&D as a percentage of total revenues. This percentage, called R&D intensity, is what industry analysts look at when judging a company's focus on future technology and products.
The same pattern can be seen in many other industries. Apple, one of the companies most highly regarded for its innovative work, doesn't spend enough on R&D even to show up on the top-100 list. Google, another very innovative firm, doesn't spend unusual amounts on research, either.
Our data confirm a study by the consulting firm Booz Allen Hamilton. It found that firms among the top tenth of their industry in R&D spending did no better than the average for that industry, although those in the bottom tenth did do worse. Nobody knows what these findings mean. Perhaps you need a certain amount of R&D but no more than that. Perhaps those companies that slight R&D do so because they have problems. Perhaps those that come to dominate their markets tend to slacken off on spending.
Any investor who would evaluate a company must look at its R&D effort, but analysts say that it's essential to take into account the industry and the maturity of the firm. New firms need to spend more on R&D to get their first products out the door. Investors should also consider how companies account for R&D: an expense may be treated as R&D at one company and lumped with manufacturing costs at another. It's good, therefore, to put this information in context--and to take it with a grain of salt.
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