October 14, 2005
Wall Street Journal
As the organization that has worked to enhance the effectiveness of industrial research since 1938, we were pleased to see your story, Tuesday, October 11, “In R&D, Brains Beat Spending in Boosting Profit” supporting the relationship between well managed R&D and positive overall financial results. We know that subtle factors in a business or in the R&D leadership or staff can vary R&D output per unit resource by an order of magnitude. However, the Booz Allen Hamilton report should be viewed with caution.
We recognize that the relationship between R&D investment and corporate profits is a complex one. While it may be true that "smart spending tops more spending," more spending can also be smart.
Years of experience by Industrial Research Institute member companies bear out the criticism expressed by Prof. Allan C. Eberhart that the time period studied was too short for a definitive study result. In practice, product-related R&D investment occurs over several years prior to launch. As far back as 1994, IRI's journal Research-Technology Management published an article demonstrating that "while R&D only affects a fraction of a corporation’s growth, it is imperative to recognize that it is that fraction which most greatly affects competitive advantage and shareholder value" (RTM Boer, P., May-June 1994.) And a study of the 1982 and 1991 recessions showed that companies that invested heavily in R&D continued to grow, while competitors with modest investments saw their sales decline (RTM, Dugal, S., and Morbey, G., July-Aug. 1995.) A 2002 McKinsey & Co. study of 1200 companies found that successful industry leaders increased their R&D spending by 22 percent during the 1990-91 recession, considerably more than their less successful peers (RTM, Nov-Dec. 2003).
Industrial Research Institute
The Industrial Research Institute was founded in 1938 under the auspices of the National Research Council. It is now an organization of some 200 companies working together to enhance the effectiveness of technological innovation by delivering solutions and best practices developed through collaborative knowledge creation. IRI member companies account for more than 10 million jobs, invest $70 billion annually in R&D and represent almost $1.5 trillion in annual sales or 15% of the gross domestic product.