Can innovation provide economic salvation?
Innovation is at the forefront of many companies' minds as they look to navigate their way through these turbulent economic waters. According to a recent article in the Economist, Asia is rapidly becoming a world leader in R&D spending. The Economist quoted OECD figures that said that every year around $1 trillion is spent on R&D in computing, telecoms and electronics. An increasing proportion of this money is being spent in Asia, with China, in particular, coming from nowhere a decade ago to becoming a leader now.
Although the US remains an R&D powerhouse, with one-third of total technology spending, budgets stateside have remained fairly flat over the last five years. Contrast this to China, where R&D budgets has increased by 23% putting its spend on parity with Japan. Taiwan now has more researchers than the UK and South Korean companies spend 6.5% of their sales revenue on R&D compared to 5% in Europe in Japan and 8% on the US. However, R&D interests have diverged between Asia and the US, with the former preferring to invest in hardware research and the latter in services.
With many companies pinning their hopes on innovation, should they follow the path being blazed by companies in Asia and invest more in R&D? While investment in R&D is essential, simply spending more isn't enough. Consultant Booz Allen Hamilton has studied the world's 1000 biggest corporate R&D spenders and found repeatedly that there is no link between company performance and R&D spending.
"there are no statistically significant relationships between R&D spending and the primary measures of financial or corporate success, including sales and earnings growth, gross and operating profitability, market capitalization growth, and total shareholder returns."
So if throwing money at R&D isn't the answer, then what is? In its research Booz Allen Hamilton identified 94 companies who consistently outperformed their competitors despite spending less on R&D. Essentially, the key is to foster a culture of innovation and spend money on projects that will ultimately deliver what customers want. For many companies this might even involve moving R&D out of its ivory tower and into customer-facing business units. Black & Decker, for example, doesn't have a centralised R&D function, with all innovation activity taking place within the appropriate business units.
Fostering a culture of innovation is crucial and all employees able to play a part in designing new products and services. Companies need to build innovation networks that bring them together along with third parties outside of the company. Analyst Forrester has long been a big promoter of innovation networks and Navi Radjou encourages companies and even nations to think outside of their own four walls when looking at R&D.