R&D Spending Shifts in Downturn

Aug 10th, 2010 | By businessnews | Category: Business

Big companies’ outlays have mounted during the recession as technology becomes integral to an increasing number of industries

David Bogoslaw

The fragile state of the U.S. economic recovery has left many companies hoarding cash, deferring hiring, and keeping a close eye on their spending. At such times, research and development budgets can suffer cuts as companies curtail outlays on the creation of new products and services—or enhancement of existing ones—to ride out the economic uncertainty.

Domestic R&D spending by all U.S. companies fell 13.1 percent, to $233.92 billion, in 2008, the most recent year for which data are available, from $269.27 billion in 2007, according to the National Science Foundation. During the prior recession, which was far milder, domestic R&D spending was down 0.5 percent, to $198.51 billion, in 2001 from $199.54 billion in 2000.

Yet even amid the sharpest economic downturn since the Great Depression, the 232 companies in the Standard & Poor’s 500 index for which data were available increased their aggregate research and development expenditures to $163.37 billion in 2008 and $166.42 billion in 2009 from $154.44 billion in 2007, before the recession began, according to Bloomberg data. (Of those 232 companies, 115 spent more on R&D in both 2008 and 2009 than they did in 2007.)

The Technology Component

The ramp-up in R&D investment during the most recent downturn isn’t surprising, given how technology is becoming a more integral component of products from all manufacturers, not just within the technology sector.

“Modern corporations of all kinds are more committed to innovation than they may have been 10 years ago,” says Mark Blaxill, co-author of The Invisible Edge: Taking Your Strategy to the Next Level Using Intellectual Property. “A lot of the functionality from the technology industry is penetrating other industries. The car is turning into a high-technology device.” Yet even as spending is rising, companies increasingly are forming alliances in an effort to make their R&D dollars stretch further.

Cuts in R&D may not signal a reduced commitment to innovation. Even outfits noted for their heavy emphasis on R&D, such as 3M (MMM), have pared their R&D budgets since before the 2008-09 recession. (3M’s $1.29 billion R&D budget in 2009 was down 5.8 percent from 2007.) R&D spending often ebbs and flows as specific projects are launched and completed. Declines in R&D in the past couple years may reflect deep cuts that many companies made in employee bonuses during the recession, rather than an actual reduction in headcount for a company’s most highly skilled personnel, says Scott Davis, an equity analyst at Morgan Stanley who covers 3M and other R&D-intensive companies. “Confidence in R&D comes down to the [number] of heads you’re willing to hire,” he says.

More Support Efforts

Even as more industries are becoming dependent on technology, a major shift in R&D spending has taken place from true innovation to product support—the incremental modifications to existing products that are done to serve the changing needs of an established customer base, says Michael Brown, president of StrategyMark, a management consulting firm in Wilmington, Del., that specializes in the chemical industry.

The flat rate of U.S. patent filings over the past three years would seem to confirm that companies are tilting more toward product support R&D and away from innovation, says Blaxill. Companies are more likely to file patents on so-called transformative R&D, which looks beyond existing technologies to future needs and requirements, while a smaller proportion of products that can be classified as support R&D are deemed worthy of a patent, he says.

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