R&D spending has long been an indicator of economic success and corporate optimism. Companies spend on R&D when they’re feel they can invest in their future. The good news is globally, R&D spending is on the rise.
Annual worldwide corporate R&D spending increased by 11% in 2018, totaling US$782bn in annual investment, based on an annual analysis of the 1000 largest global public companies by R&D spend laid out in the 14th edition of PwC’s Strategy & Global Innovation 1000 Study. The survey shows how innovation investment is related to long-term growth strategies and confidence, with R&D spending increasing across all regions and nearly all industries.
Key Learnings:
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China and Europe increase R&D spending the most as global R&D investment reaches US$782bn
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88 companies outperform industry peers on sustained financial success with modest R&D spend
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Amazon retains top spot as world’s largest corporate spender on R&D
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Apple regains top rank as world’s most innovative company from Alphabet; Netflix joins top 10 for first time, according to global survey of R&D leaders and managers
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The consumer industry saw the highest R&D spend, overtaking the software & internet industry for the first time in five years
Globally, all regions saw an increase in R&D spend, most notably China (+34%) and Europe (14%) where spending grew by double digit rates, while North America (+7.8%) and Japan (+9.3%) saw only single digits increases in R&D. Overall R&D intensity – the measure of R&D spending relative to sales – remains at an all-time high of 4.5%.
According to Barry Jaruzelski, Principal, PwC US, Strategy, “The standard of innovation excellence has been rising as businesses have become more competitive in the 21st century. Despite the record high levels of investment, the study’s findings are a further confirmation that innovation excellence isn’t something that can be bought by simply spending more on R&D. Rather, it’s the result of painstaking attention to strategy, culture, senior executive involvement, deep customer insights, and disciplined execution across the innovation cycle.”
R&D spending is key to success
In a five-year study of company performance and innovation investment relative to industry peers as part of this year’s report, 88 companies world-wide, across all regions and industries, were assessed as ‘high-leverage innovators’.These companies outperformed their industry groups on seven key measures of financial success for a sustained five-year period, while at the same time spending less than the median of their industry peers on R&D as a percentage of sales. The basket of seven metrics of financial success include revenue growth, market capitalization growth, operating margin, gross margin, operating profit growth, gross profit growth, and total shareholder return (TSR).
While high-leverage innovators had similar operating and gross margins as other Global Innovation 1000 companies for the five years ending in 2017, the companies demonstrated sales growth which was 2.6 times greater than other companies on the Global Innovation 1000 list and with growth in market capitalization that was 2.9 times higher. High-leverage innovator firms achieved performance at least twice as high as other firms on all other metrics examined. They achieved this sustained superior performance while spending less that the median of their industry peer group on R&D as a percentage of sales for the entire five-year period.
Common characteristics:
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Alignment: 77% of fastest growing firms say their innovation strategies are highly aligned with their business strategies, compared with 54% of respondents that report the same growth, and 32% of respondents that report slower growth.
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Culture: 71% of respondents that report their companies’ revenues are growing faster than competitors say their corporate cultures are highly aligned with their innovation strategy, compared with 53% of companies that report the same growth, and 33% of companies that report slower growth.
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Leadership: 78% of companies reporting higher than peer revenue growth say their executive team is highly or closely aligned with R&D investment and innovation strategy, compared with 62% for same-growth companies, and 53% for slower-growth companies.
China leads the worlds in R&D spending
Regionally, the list reflects the continued dramatic rise of China-based companies — from 3% in the first High-leverage Innovators assessment in 2007 to 17% in 2017. Europe too increased significantly from 18% in 2007 to 30% in 2017. The number of high-leverage innovators fell 45% for North American companies and 8% for Japanese companies.
By industry, the number of high-leverage innovators rose from 2007 to 2017 in telecommunications, consumer, healthcare, industrials, autos, and aerospace and defence, while the numbers fell in chemicals and energy, computing and electronics, and software and internet.Key Takeaways:
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Amazon maintained the top spot as the largest spender on R&D in the Global Innovation 1000 study, for the second year in a row. Sanofi and Siemens rejoined the Top 20 spenders globally.
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Apple regains the top rank as the world’s most innovative company from Alphabet, while Netflix joins the top 10 most innovative companies list for the first time, according to a global survey of R&D leaders and managers.
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The consumer industry overtook the software & internet industry for the first time in five years, experiencing fastest year-on-year growth in R&D spending (26% vs 20.6%)
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Healthcare industry in on track to become the biggest R&D spending sector by 2020.
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Computing & electronics, healthcare and automotive industries together represent 60% of global corporate R&D spending in 2018.
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China and Europe saw increases in the number of companies in the Top 1000, while North America (-5%), Japan (-6%) saw decreases.
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