Research & Development: Transforming Energy Markets or Betting on Mistakes?

There’s no better way to take the pulse of innovation than to survey R&D spending. And there’s no better time than during a downturn, because history tells us that this is the opportunity for businesses to gain advantage by investing and growing.

Two recent R&D surveys, one from the Wall Street Journal and the other from McKinsey were released recently and both confirm that many companies are still spending on R&D (for now).

(Photo: Battelle Institute)

So what about green investment? Are companies spending on cleantech? They should be, since transforming energy markets (which is critical) will require an unprecedented level of R&D.

But the challenges are enormous. The energy industry is the largest on the planet, with sales of more than $2 trillion a year, and industrial labs and government have scaled back R&D drastically over the past 20 to 30 years.

Still, the Obama administration seems at least to recognize the need. It has outlined an ambitious policy to invest in energy R&D, a big reversal from previous years of shrinking energy R&D budgets. Whether the government can sustain the investment is unclear (R&D is expensive) but the gains from R&D today will far exceed the up-front cost 20 years down the road.

Encouragingly, the Battelle Institute, which tracks R&D investment, predicts cumulative spending by companies, government and universities will rise 3 percent this year, although it predicts a decline in 2010. Battelle notes that R&D cuts during the downturns of the 1980s and 1990s took more than five years to return to prior spending levels.

Companies keeping up R&D funding include Microsoft, which spent 21 percent more in fourth quarter 2008 over 2007, while revenue was virtually flat. IBM is also spending on R&D, partly because of government-stimulus money. IBM says it plans to keep its R&D spending at the same level it was last year. Corning claims it will cut everything else possible before cutting R&D. Corning executives devised a strategy last summer called “rings of defense” to put into play during this downturn. In this strategy, R&D is in the innermost ring.

On the flip side, McKinsey cites evidence that some companies are pondering reductions in R&D spending. In its survey, 40 percent of respondents say their companies are actively seeking to reduce R&D costs. Some 34 percent of executives surveyed said R&D budgets are lower in 2009 than they were in 2008. The majority also said they’re taking a new approach to R&D in the current economic circumstances, with many turning to shorter-term, lower-risk projects.

That’s a little alarming, considering the historical benefits of investing in long-term innovation. But at least some realize that slowing R&D amounts to gradual self-destruction. “Companies by and large realize that large reductions in R&D are suicidal,” said Jim Andrew, senior partner at the Boston Consulting Group, in the WSJ story. “It is the last shoe to drop.”

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