WELSH BUSINESS R&D PERFORMANCE AND WHAT BUSINESS CAN DO TO IMPROVE IT

This week, the Office for National Statistics released the latest UK business R&D expenditure data a few days ago and this gives us the opportunity to benchmark the UK against the Global Innovation 1000 report discussed in an earlier article.

The good news is that, as with the overall global data, spending on innovation is increasing within the UK.

According to these statistics, spending on industrial R&D by British companies had actually increased by eight per cent in 2011 to £17.4 billion, which is a higher growth rate than for Europe as a whole.

As demonstrated in the Global Innovation 1000 report, the sectors that had grown the most were computer and information service activities, motor vehicles and parts and the pharmaceuticals industry. Collectively, these three industries had increased their R&D expenditure in the UK by £750m in the last twelve months.

And whilst large firms remain the big spenders, the proportion of expenditure by SMEs has actually grown from 14 per cent in 2006 to 23 per cent in 2011, showing the growing impact of entrepreneurial firms on innovation.

For Wales, the data provided a mixed picture.

Whilst business spending on R&D has increased by 77 per cent since 2000 (as compared to 51 per cent for the UK), growth has been relatively flat over the last few years (see graph below). Indeed, Welsh companies provide less than 1.5 per cent of the total amount of business R&D undertake within the UK, well below what would be expected proportionally. This demonstrates how dependent the Welsh economy has become on its university sector as the main source of research and how important it is to get the mechanisms right to get new products and processes from the laboratory into the marketplace.

More relevantly, the Welsh Government’s aim of having business R&D as one per cent of the economy remains a distant target, with the data suggesting that firms would have to spend an additional £200m per annum to reach this target.

Of course, politicians can only do so much to support innovation within the business community and firms themselves need to develop new ways of exploiting research findings and transferring them into the marketplace. And that is where some of the more detailed findings of the Global Innovation 1000 study may prove useful.

Through detailed interviews with major innovators, one of the most important (and perhaps more obvious) findings from the survey is that there seems to be no long term correlation between the amount of money a company spends on its innovation efforts and its overall financial performance.

What is more important is how businesses use that money and the quality of their talent, processes, and decision-making. Therefore whilst Welsh businesses spend comparatively less than firms in other regions on R&D, this does not necessarily mean that they are not using those funds productively.
Another key finding is that over half of those innovative companies interviewed said that they actually weren’t very good at it. In fact, only a quarter of the firms believed that they generated ideas effectively and, at the same times, converted those ideas into new product development projects.

But what is important about these firms is that they have a consistent set of principles and processes to turn ideas into potential commercial projects and, crucially, any company in any industry to get the most out of the money they spend on innovation can use these tools.

For example, the most common method for coming up with new ideas was “direct observations of customers”. In addition, the main internal mechanism that companies used to support commercialisation was the employment of “innovation champions” within organisations, namely employees who are assigned to coordinate the capture, development, and promotion of new ideas.

I wonder how many Welsh organisations have such individuals employed to boost innovation internally?

One of the more interesting findings is that major companies use open innovation in idea generation sparingly. This is unexpected given that this has been a major source of discussion as the new paradigm for accessing new ideas. However, the fact that a small but growing number of firms are seeking out new ideas from a variety of sources outside their conventional domains, including innovation contests and social networking, does offer opportunities for Welsh companies, especially if the whole concept of open innovation can be adopted by senior managers within these firms.

Therefore, whilst R&D expenditure by private companies in Wales has slowed down in recent years, there are certainly lessons that can be learnt from other businesses to make the most of the money spent on innovation. In particular, there needs to be a greater emphasis on the development of innovation skills that, ironically, no Welsh university currently offers to the business community.

There are certainly plenty of opportunities for Welsh firms to make the most of innovation as a competitive tool and hopefully, through its new innovation policy, the Welsh Government will be able to provide the support necessary to access these opportunities wherever possible.

INCREASED INVESTMENT IN INNOVATION CAN LEAD TO GLOBAL ECONOMIC RECOVERY

Innovation is key to the competitiveness of nations, which is why the recent Global Innovation 1000 study by the strategy consultants Booz and Company into corporate research and development (R&D) spending is a critical indicator as to how the world economy is emerging from the worst recession since the First World War.

And contrary to the doom and gloom peddled by some on the future prospects for the global economy, the encouraging news from this report is that the world’s most innovative businesses are again beginning to invest in research that will lead to new products and services.

According to the study, R&D spending by the Global Innovation 1000 increased 9.6 percent to £380 billion in 2011. Whilst this may have been expected after the slowdown in spending that occurred during the global recession, this recovery is, contrary to expectations, actually stronger than that following the last major economic downturn after the dot.com crash back in 2000.

For example, expenditure on R&D in the first three years after that global shock increased by an average of 3.5 per cent as compared to 9.5 per cent between 2009 and 2011.

In fact, three quarters of the companies surveyed actually increased their R&D spending in 2011, with only 19 per cent spending less.

It is worth noting that  R&D is increasingly focused within a small number of companies globally, with 10 per cent of the Global Innovation 1000 accounting for two thirds of the total expenditure of R&D in 2011 and half of the increase in R&D spending.

There is also a concentration in terms of R&D intensive sectors, with computing and electronics, automotive and healthcare being responsible for two thirds of all spending in 2011.

Of these three key sectors, computing and electronics continues to dominate innovation, spending £105 billion on R&D in 2011 (or 28 per cent of the global total).

Interestingly, it was not an American firm that led the way in this expenditure. Instead, it was Samsung, driven by its mission to overtake Apple within the smartphone industry sector, that increased its spending by almost 14 percent to £5.7 billion.

And with advances such as cloud computing changing the way that consumers will be accessing and using their electronic devices in the future, it is not surprising that even traditional players such as Hewlett Packard, Sony and Texas Instruments have increased their R&D intensity over the last year in order to keep up with newer companies on the block.

However, it is not only emerging technologies which are R&D intensive and many analysts remain surprised by the Lazarean recovery of the automotive sector during the last four years and its renewed enthusiasm for innovation.

Indeed, the increase of 15 per cent in R&D expenditure contrasts with the 14 per cent decrease experienced in 2009, and has been led by companies such as Volkswagen, Daimler, General Motors and Honda, with Toyota becoming the largest corporate R&D spender in the World in 2011.

In contrast, the healthcare sector seems to be treading water in terms of research investment, with major companies instead choosing to return money to shareholders.

And whilst companies such as Roche, Pfizer and Merck remain in the top ten R&D companies in the World, they have all reduced spending in the last 12 months as regulatory uncertainty means that they are reluctant to invest in R&D without a clearer path to market

In terms of expenditure by region, the data continues to have some bad news for Europe, especially relative to other parts of the World.

For example, the largest overall increase in absolute spending continues to be experienced in North America, where R&D spending grew by ten per cent in 2011, thanks to companies such as Microsoft, Intel, Merck, Pfizer and General Motors which, between them, spent £27 billion on R&D.

In contrast, R&D spending in Europe increased by only five per cent in 2011, well below the average seven per cent increase experienced during the previous five years. This is despite having two companies – Novartis and Roche – in the top three corporate R&D spenders in the World.

And given that the European Union has targeted increased research and innovation as a key part of its growth strategy over the next few years, much remains to be done in terms of ensuring that we keep up with the rest of the World, never mind overtake it.

In fact, the emerging economies of China and India posted an impressive 27 per cent growth in 2011, although this was from a low base and their overall contribution to global R&D remains low at less than three per cent of the total.

And worryingly for the West, this does indicate that those developing countries previously seen as sources for cheap manufacturing are now beginning to move the value chain by investing in innovation.

Therefore, the report shows that the overall global picture for innovation seems to be one of recovery and renewal, which would have been the last thing anyone would have expected four years ago.

However, the question for European policymakers and corporate leaders is whether they will be able to close the growing gap in R&D spending with the rest of the World and, more importantly, develop new innovations that will have a real impact in the marketplace?