INDUSTRIAL RESEARCH INSTITUTE'S R&D TRENDS FORECAST FOR 2011

Investment in R&D is projected to rebound as focus on innovation intensifies

Rich Antcliff is the Chief Technologist at NASA Langley Research Center. He is the former chairman of the IRI Laboratory of the Future ROR working group and the current chairman of the ROR Leadership Team. richard.r.antcliff@nasa.gov

The Industrial Research Institute's (IRI) 2010 survey of member companies suggests that 2011 may see a dramatic turnaround in R&D investment. This year, 119 companies across a broad range of industries provided input to the survey; their responses indicate that R&D increases are expected across almost all industry sectors.

The primary focus of this investment is on new-business development projects. Aggressively pursuing innovation and balancing innovation in the overall R&D portfolio continue to be management challenges for the leaders who responded to the survey. They are also concerned about acquisition of, and access to, talent. However, they consistently cite alliance development as a strategy that they are pursuing to address these concerns.

Background

This is the IRI's 27th R&D Trends Forecast. The survey, which was conducted in July and August of 2010, is focused on expectations for industrial R&D investment in 2011 and based on responses from 95 IRI member companies and 23 non-IRI companies. Because this is a voluntary survey and IRI membership changes due to business events such as mergers, the mix of companies changes from year to year. Nevertheless, we believe that there are a sufficient number of responses from the industrial R&D community for the data to be meaningful.

The results of this survey are discussed as follows:

• A profile of participants
• A summary of R&D expectations
    ○ The trends of expectations over time
    ○ The trends by industry sector
    ○ A look back at last year's predictions and a comparison with this year's results
• Insights into R&D collaboration
• Trends in international collaboration
• Answers to the question “What keeps you up at night?”

Profile of Survey Participants

Figure 1 shows the distribution of the 119 survey participants by projected 2011 corporate revenues. The participants are medium to large companies, many multinational, with a total of 308 laboratories outside of the United States in 43 countries.

Figure 1.—Distribution of participants by corporate revenue

As Figure 2 illustrates, 80 percent of the companies surveyed were IRI members, but nonmembers were also invited to participate, and 23 nonmember companies accepted the invitation.

Figure 2.—IRI membership among survey participants

A Summary of R&D Expectations

The principal survey questions and the distribution of the responses are presented in Table 1.

The R&D managers we surveyed projected a significant upturn in R&D spending in 2011; 53 percent of respondents indicated that they expected an increase in their R&D budgets, while only 12 percent expect a decrease. The managers expect this increase to be focused on new-business projects. While most respondents reported expectations that capital spending, support of existing businesses, and directed basic research would remain relatively flat, 60 percent indicated that they thought R&D budgets focused on new-business development would increase, as compared with only 9 percent who thought their spending in this area might decrease. It should be mentioned that although expectations of funding for directed basic research on average remained relatively flat, there are companies who are both significantly increasing and significantly decreasing these budgets, displaying very different strategies for the future.

The expectations for R&D hiring in 2011 also appear to be positive. Although very few respondents expect large increases, most companies will remain at current levels or increase either professional personnel levels or new-graduate hiring or both. Finally, most managers indicated that their companies are staying with their current licensing strategies, with approximately 70 percent of managers indicating that they will not change the dollar value of licenses that they acquire or produce in the coming year.

Trends Over Time

It is very useful to look at the trends in this survey data over time. To simplify this view, we calculate a sea change index; the index is calculated by subtracting the number of respondents who project a negative change (<0%) from the number who project a positive change (>5%) and normalizing the data on a 100-point scale. The sea change index is stated as a percentage that can vary between -100% and &plus;100%. The 2011 sea change index for key categories of R&D spending is presented in Figure 3.

Figure 3.—Sea change index for key categories of R&D spending

This figure clearly illustrates the dramatic shift in expectations of managers from 2009 and 2010 to 2011. The sea change for R&D expenditures alone went from an expectation of -22 in 2010 to &plus;21 in 2011. This shows quite a turnaround in optimism relative to R&D budgets. Although all areas improved over last year, the index shows that new-business projects are expected to get the lion's share of R&D expenditures in the coming year.

Industry Sector Trends

Industry segment data was collected as a part of this survey. Data is presented for segments that are represented by at least five companies. A few sector trends are discussed below; all of the sector data can be viewed by visiting http://www.iriweb.org/TrendsSurvey.

As mentioned previously, most industry managers expect increases in R&D budgets in 2011. The sector data shown in Figures 4 and 5 indicates this is true for all sectors except the aerospace industry, which reports a slight potential decrease in both total R&D expenditures and funding for new-business projects.

Figure 4.—Changes in total R&D expenditures by industry sector

Figure 5.—Changes in R&D support for new-business projects

Figure 6 shows the divergence of strategies relative to directed basic research in different sectors. The petrochemical and federal labs sectors project increases in directed basic research, while other industry sectors show some decreases.

Figure 6.—Changes in directed basic research expenditures by industry sector

How Did We Do Last Year?

We asked respondents to tell us what the actual change in their R&D budgets were this year so that we could compare those against their predictions in last year's survey. Last year, managers were very pessimistic about R&D budgets, posting a sea change index of –22. In other words, many more managers felt that their budgets would be reduced significantly relative to the previous year than felt that their budgets would be increased. However, the data respondents provided this year showed that they were much too pessimistic. Figure 7 shows that a great majority of managers experienced level or increased R&D funding in 2010.

Figure 7.—Actual R&D spending in 2010 relative to 2009

Figure 8 shows changes in R&D funding by corporate revenue. When we look across industry sectors, we see that R&D spending declined in 2010 only in the smallest companies. This certainly explains respondents’ optimism in their projections for 2011 R&D funding.

Figure 8.—Change in R&D spending, 2009 to 2010, by corporate revenue

External Collaborations

External collaborations continue to be an area of increased emphasis according to the managers surveyed. Table 2 shows that the overwhelming majority of companies will utilize these tools either at the same level or at a greater intensity than in previous years.

Figure 9 illustrates changes in the sea change index for collaboration from 2007 through 2011. Two interesting observations are exposed by looking at the trends of this data over time. First, participation in alliances and joint R&D ventures consistently sits atop these categories, as the venue for the most investment. R&D managers continue to expect such relationships to be important as we look forward. There is also an interesting countertrend in the area of contracts with federal labs in the 2010 and 2011 data. This may be an anomaly, or it may reflect an inverse relationship between the general financial state and the extent of reliance on federal contracts for R&D funding.

Figure 9.—Sea change index for projected spending on external collaboration, 2007–2011

International R&D

For the last four years, we have asked participants about the location of their R&D facilities and in particular about the placement of R&D facilities in international venues; Table 3 summarizes responses to this question. As in past years, a large majority (~70 percent) of participating companies now have R&D facilities overseas. The list of countries that host these laboratories has remained relatively constant. The BRIC countries offer a particularly interesting case: China and India have always held high positions on this list; Brazil has only recently risen into the top ten, while Russia still lumbers near the bottom of the list.

What Keeps You Up At Night

The answer to this question has not changed much in the last 15 years—innovation. As Figure 10 shows, when asked about the top challenges facing R&D managers, respondents indicated that their biggest problems were “growing the business through innovation,” “accelerating innovation,” and “balancing long-term and short-term R&D objectives.” These responses show a continued concern over getting innovation management right. This is further supported by responses like “integrating technology planning and business strategy,” another highly rated concern. Showing the payoff and finding the right balance of technology and innovation investments is still a challenge for these senior managers. Attracting, developing, and retaining talent also were the focus for increasing concern this year.

Figure 10.—Responses to question regarding top challenges

Summary

Overall, R&D managers are optimistic about their budgets for 2011. This reverses the pessimistic trend that has characterized the past couple of years. Most of that projected increase appears to be headed toward new-business projects. Global placement of R&D laboratories and the use of alliances and joint ventures both appear to retain significant importance as business strategies. Innovation and the balance of that innovation with critical business functions continue to be the tough management problems faced by these senior R&D managers.