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FEATURE ARTICLE

2013 R&D Trends Forecast: Results from the Industrial Research Institute’s Annual Survey

IRI’s 2012 trends survey results suggest that R&D leaders are anticipating a year of weak yet stable growth.

The Industrial Research Institute


Following several years of wide investment swings due to a drastically changing economic landscape, the Industrial Research Institute’s (IRI) 2012 survey results suggest that R&D leaders are anticipating a year of weak yet stable growth. Responses to this year’s survey are optimistic, but less so than last year. As was true last year, the largest growth is in new-business projects, while support for existing businesses and for directed basic research are both expected to decline. Although at least one industrial sector represented by survey respondents reports an expected reduction in spending for 2013, most respondents are preparing for a period of managed growth, in contrast to the cycles of rapid contraction and expansion that have characterized recent years.

Background

This is IRI’s 29th annual R&D Trends Forecast. The survey, which was conducted in July and August of 2012, asks R&D leaders about both their actual activity in the past year and their expected investment levels for the coming year. Other areas explored include the international dispersion of R&D facilities and the top concerns for respondents going into 2013. The analysis is based on data from 114 respondent companies, 101 of which are IRI member organizations. Due to the changing membership of IRI and the voluntary nature of the survey, the mix of companies represented each year fluctuates. However, we believe there are enough responses from a large enough cross-section of industries to provide insight into general trends.

After a brief profile of the survey participants, the results are reported in three sections:

  1. Responses to the survey’s basic questions on investment levels, along with historical comparisons and industry segmentation;
  2. Insights into trends regarding collaboration and international investment; and,
  3. Discussion of survey respondents’ top concerns.

 

Profile of Survey Participants

The 114 respondent companies come from a broad cross-section of industries (Table 1). The organizations participating in this survey are medium to large corporations (Table 2). Most have a global reach; taken together, respondent companies have a total of 278 labs outside the United States spread across 30 countries. China holds the largest share of these labs (49), followed by Germany (30), England (24), India (21), and France (20).


Table 1. Survey respondents by industry


Table 2. Survey respondents by corporate revenue


Some respondents left some questions unanswered; the average number of responses for each question is approximately 103.

Expectations for R&D Investment

The survey’s principal purpose is to identify participant expectations with regard to R&D spending for next year, in comparison to this year (Table 3).


Table 3. Responses to questions regarding expected changes for 2013 compared to 2012* 


Overall, the data reveal very few significant changes in direction or sentiment. R&D managers report mild optimism for spending going into 2013; 89 percent of respondents indicate that they expect R&D investment to either remain the same or increase, while 11 percent expect it to decrease. Investment in new business is anticipated to see the highest relative growth by R&D managers, with 29 percent of respondents expecting an investment increase and only 10 percent expecting a decrease. Directed basic research, however, shows the largest relative downturn, with 21 percent indicating an expected decrease in investment.

Licensing strategies for 2013 are expected to remain the same, at least in terms of funding; approximately 74 percent of respondents anticipate no change in the dollar value of licenses they produce or acquire. Respondents indicated that money spent on customer service and technical support will likely remain unchanged in 2013. Finally, the data on hiring indicate that R&D managers are expecting moderate growth in both professional hiring (89 percent expect an increase or no change) and new graduate hiring (87 percent expect an increase or no change), supporting the overall trend of stable, managed growth going into 2013.

Trends Over Time

Comparing the results of this survey with results from past years’ editions provides a view of trends as they emerge over time. These trends are visualized via a “sea change index,” which is calculated by subtracting the number of respondents who anticipate a negative change (<0 percent) from the number who anticipate a positive change (>5 percent) and normalizing the data to a 100-point scale. The range of this index varies from -100 percent to +100 percent.

It’s important to note that the trends over time visualized in the sea change indexes may run counter to some of the optimism seen in the annual data. In 2011, the sea change index fell to +13 percent, indicating a pullback from 2010’s extreme optimism, which pushed the sea change index to +21 percent. The 2012 data reveal a continuation of this pullback, dropping the index another 5 points to +8 percent. This suggests that companies may still be adjusting their strategies to accommodate a changing business landscape.

The 2012 Sea Change Index for R&D spending suggests continued stabilization of capital spending patterns after the tumultuous 2009–2010 period; however, a worrying downward movement is evident in total R&D spending (Figure 1). The sharp downturn in R&D/sales ratios suggests rising pessimism or at least a shift in focus. Breaking down total R&D spending into its constituent parts reveals continued anticipation of a boost in new-business investment in the coming year, although the sea change index shows that growth will be slower than was anticipated for last year. Directed basic research is expected to receive less investment than in the previous year, although that reduction will be less than it has been in recent years, as shown by the upward slope of the plot (Figure 2). Anticipated growth in investment in both new and existing business investments shifted downward mildly from last year’s results, suggesting an increase in pessimism about business growth in 2013 compared to 2012.


Figure 1. Sea Change Index for total R&D spending


Figure 2. Sea Change Index for R&D expenditures by type


Industry Sector Trends

Information about participants’ industry segment data is collected as part of the trends survey; the data is then analyzed by industry segment in order to more closely examine where the biggest changes are taking place. To be included in the segmentation data, an industry sector must be represented by at least five survey respondents. This year, qualifying industrial segments include chemicals, industrial machinery/equipment, consumer products, food, and metals.

Projections for 2013 across these segments largely indicate growth in line with the overall survey findings; however, feelings in several industries diverge significantly from the general mild optimism (Figure 3). The metals industries, in particular, are in a moderate decline. The only bright spot for generally pessimistic respondents in this industry is new graduate hires, which are expected to rise in 2013. R&D managers from consumer product companies are anticipating very little change but expect a decline in overall hiring and no change in the number of new graduate hires, putting downward pressure on the industry’s overall sentiment. In contrast, investment in new business projects, capital spending, and even directed basic research is expected to increase strongly in the chemical industry, which represents 29 percent of total survey respondents; as a result of its strong showing, these positive projections largely offset the decline seen in other industries to produce a more positive overall assessment.


Figure 3. Year-over-year sea change indices by industry


How Did We Do Last Year?

To contextualize our annual forecast, we ask respondents about their actual R&D budgets this year so we can compare them to the responses to last year’s survey. Most companies (58 percent) saw no difference between their actual 2012 spending and their projections for 2012, but almost a quarter of respondents (24 percent) said actual budgets were lower than forecasted.

We asked respondents to identify the top three factors in differences between projected and actual budgets. Among the top reasons given, the most important was changing business conditions. Other important factors included a changed growth emphasis and company strategy changes (Figure 4). All of these are indicative of continued market volatility.


Figure 4. Factors leading to differences in actual vs. projected 2012 spending


External Collaborations

We asked respondents about their projected spending on a range of external collaboration mechanisms (Table 4). Visualizing our collaboration data on a sea change index reveals that external collaborations continue to experience positive growth, albeit with a downturn in expectations from last year’s results (Figure 5). R&D managers remain optimistic in their outlook on alliances, partnerships, and collaboration agreements. Respondents do anticipate, however, a year-on-year decline in anticipated growth in all but one category. Most significant is the much weaker growth, compared to previous years, in the number of expected contracts with federal laboratories. However, the strong upward movement of expectations for alliances and joint projects suggests that cooperation remains a significant strategy for corporate R&D.


Table 4. Responses to question regarding expected changes in external collaborations* 


Figure 5. Sea Change Index for Collaboration Activities, 2006-2013


International R&D

In an effort to trace global investment trends, we ask survey participants where they locate R&D facilities outside of the United States. Approximately 76 percent of respondents indicated that their organizations have R&D facilities located outside of the United States, primarily in western Europe and east and southeast Asia (Table 5).


Table 5. Distribution of non-U.S. labs by region


The distribution of countries has narrowed since 2012, however, with ten dropping from the list; many of those lost this year were added in the 2011 upswing (Table 6). Scotland, New Zealand, and Costa Rica entered the list for the first time this year. There were sharp decreases in the number of companies with labs located in Italy, Spain, Sweden, Malaysia, and Japan, and a noticeable increase in labs located in China, Australia, Belgium, and Korea. These patterns appear to follow closely with investment risk/return changes by country. Italy and Spain, for instance, have undergone financial crises that triggered significant austerity measures and brought tax changes; together, these changes both decreased stability and increased the potential costs of doing business in these countries. China’s continued economic strength remains a significant enticement for companies, resulting in an increasing number of new labs within its borders.


Table 6. Non-U.S. lab distribution by country


Top Concerns

Over the last 15 years, or perhaps longer, the top responses to the question regarding primary concerns have been “accelerating innovation” and “growing the business through innovation.” This year, however, the options for answering this question underwent a minor adjustment as a result of the understanding that the top occupation of R&D managers—as defined by their positions—is always accelerating innovation, making this the obvious top choice for respondents thinking about their concerns. To help refine the picture of what R&D managers are most concerned about, we removed this obvious choice from the list of available answers. We have also expanded the question by asking respondents to list their top three concerns rather than their top two, as we have in the past.

The responses to this modified question reveal a much greater concern with balancing long-term and short-term R&D objectives than with any of the other categories offered (Figure 6). The categories “attracting, developing, and retaining talent” and “building and maintaining an innovation culture” were a close second and third, respectively. Worth noting is that the third most common “top concern” (that is, the option ranked number one by respondents) is tied between two other categories, “managing innovation globally” and “gaining senior management support for technology-based innovation,” each of which was identified by 8 percent of respondents as their number one concern.


Figure 6. Top concerns of R&D managers


To provide better insight into this aspect of our analysis, we segmented the data on top concerns by industry to see if a difference in focus could be discerned in different industries (Table 7). In general, industry-specific concerns line up relatively well with the overall trends. However, there were some interesting differences. For instance, the top concern of metal industry managers was not balancing short- and long-term R&D projects but gaining senior management support for innovation. We also see a much greater emphasis on balancing short- and long-term objectives in the food industry than elsewhere and more concern regarding the management of innovation on a global scale among consumer industries than in other segments.


Table 7. Top-ranked concerns by industry


Summary

On the whole, R&D managers appear to harbor a persistent optimism about R&D investment going into 2013. This sentiment may be tempered a bit from last year, but it is undeniable nonetheless. New-business R&D projects remain a significant driver of investment, as illustrated by the positive showing on the sea change index for this indicator, although growth is projected to be smaller than it was last year. The anticipation of increased alliances and partnerships globally also suggests that industries are anticipating varying degrees of R&D and business growth. The total number of laboratories located outside of the United States has risen as well, suggesting an increase in optimism about the world market and a continuation of the tendency toward globalization. While data suggest that some industries are undergoing more hardship than others, our analysis nevertheless paints a picture of a market entering a period of mild and managed growth, even as it continues to struggle with the continuing impact of the recent economic crises.

Special thanks to Jennifer Blenkle, VP of research and innovation at IRI, for compiling, distributing, and collecting the trends survey and its results, and to Greg Holden, business writer at IRI, for his help in constructing this article.