Companies shown to reap what they sow

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Evidence is growing to support the premise behind the R&D Scoreboard: that “R&D is good for you”. Companies that spend more on research and development tend to perform better than their competitors in sales and profits growth.

When the UK Department of Trade and Industry started the project in1991, it was based on a widespread belief that British companies were suffering from under-investment in science and technology, though there was little hard evidence to support that view.

But Mike Tubbs, who has led the DTI’s R&D Scoreboard analysis for the past eight years, says the link between R&D spending and growth is now incontrovertible, “though, of course, good R&D alone does not assure business success because there are other important factors involved in innovation”.

A simple example of the benefits of R&D spending for share price is the performance of the scoreboard’s “R&D portfolio”, comprised of companies in the FTSE100 index that devote more than 4 per cent of their turnover to R&D. Since it started in August 1997, the portfolio has increased in value by 73 per cent, while the FTSE100 has risen by only 16 per cent (see graph below).

A comparison of companies within sectors is more revealing. In technology hardware and software there is a very clear correlation between long-term R&D growth and sales growth, says Mr Tubbs. Technology companies that responded to the sector’s slump in sales between 2001 and 2003 by increasing R&D, such as Nokia, AMD and Juniper Networks, have done much better since then than the companies that cut R&D.

Technology policy experts in Europe maintain that the region’s under-investment in corporate R&D in comparison with the US has contributed to an underperformance in innovation, which has led to slower economic growth.

Measures to persuade European companies to spend more on R&D have so far concentrated on the “supply side” such as grants, subsidies and tax credits, says Luke Georghiou, director of Policy Research in Engineering, Science and Technology at Manchester Business School. But policymakers are now switching attention to the demand side. “All the evidence shows that firms are influenced more than anything by the market,” Prof Georghiou says. “If we can stimulate the demand for innovative goods and services, then firms are stimulated to increase their R&D. That is more effective than offering bigger government subsidies or tax credits.”

The Aho Group, an independent expert group, has made an impact this year by proposing a demand-led strategy to stimulate European innovation. This would include making far better use of public procurement through R&D contracts.

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