Ignore the Chicken Littles of Corporate R&D; Spending

The Chicken Littles of R&D; are back, and they’re roosting on the front page of the New York Times.

“A Corporate Lag in Research Funds Is Causing Worry,” warns Tuesday’s headline, and that puts America’s “High-Tech Edge at Stake.” The story cites a new National Science Foundation survey revealing that, after adjusting for inflation, corporate research and development spending actually declined in 1989--almost 1%!--for the first time in nearly 15 years. Prominent R&D; gurus were said to be gnashing their teeth and rending their garments.

Guess it’s time to learn Japanese.

Actually, the New York Times story captures perfectly the conventional wisdom about America’s research and development spending: Cut R&D; spending and you emasculate U.S. competitiveness in global markets. More is better. Much more is much better.

The conventional wisdom is rubbish.

Does anybody anywhere seriously believe that the root of General Motors’ problems can be traced to the fact that the auto giant spends only $5 billion annually on R&D;? Or that International Business Machines’ margins and market share woes stem from its $4.4-billion R&D; budget? Or that Eastman Kodak’s financial quandaries would vanish if the company would only boost its $1.1-billion R&D; budget?

Of course not. The belief that the most productive way these companies could spend an extra dollar is on R&D; is ridiculous. These companies face challenges that go far beyond that. The folks who shriek that American companies need to jack up R&D; budgets are no better than the knee-jerk liberals who believe that you cure poverty by throwing money at welfare programs or rabid right wingers who think that you purchase national security by lavishing funds on weapons systems.

The issue isn’t how much you spend; it’s what kind of return are you getting for what you spend? How productive is your R&D; effort? Very clearly, many companies aren’t getting adequate returns--financial or otherwise. So why shouldn’t they pause, reconsider and re-evaluate what they want from their innovation infrastructures?

According to the NSF, just 20 companies account for nearly 40% of the total corporate $68.8-billion R&D; investment in this country. While I have nothing but admiration for most scientists and engineers I’ve met in corporate R&D;, why should giant corporate R&D; efforts be more immune from bloat and inefficiency than any other corporate function? Does “lean and mean” apply to every department but R&D;? Isn’t it possible that some of these corporate R&D; behemoths are bumping into the point of diminishing returns? Sure, there may be dozens of brilliant ideas bouncing around Xerox, General Electric and AT&T--but; if the corporation lacks the will or ability to profitably apply that knowledge, then the corporation is getting zero return.

“The real issues have much less to do with the amounts for R&D; spending and much more to do with the behavior and abilities of general management,” says Joseph G. Marone, an assistant professor at Rensselaer Polytechnic Institute’s School of Management and an NSF consultant. “If our conclusion is that we should spend more, then we are missing the big picture.”

Marone points to research he’s done on GE Plastics, one of General Electric’s most successful businesses. It grew from zero to more than $2.5 billion a year in sales in a highly research-intensive industry with a research budget that amounted to less than 3.5% of sales--far below the industry average. “Spending doesn’t drive the game,” Marone insists. “It’s the integration of technology into the management style.”

Nobel laureate economist Robert Solow, who served as co-chairman of Massachusetts Institute of Technology’s Commission on Industrial Productivity, effectively agrees. While acknowledging that the drop in corporate R&D; spending is “not an optimistic sign,” he notes that “economists are often accused of only thinking that budgets or interest rates matter. . . . (After serving on the commission) I was much impressed in how much local management practice mattered. I was less than enthralled” by the way most top managements handled the R&D; function.

In other words, when it comes to R&D;, effectively managing human capital seems to be at least as important as spending financial capital. This is hardly a revolutionary concept, but people seem to forget it when they look at those NSF R&D; budget numbers. But then, some doctors would rather look at a thermometer than at the patient.

To be sure, there seem to be fundamental changes in the growth of R&D; spending. “This (drop) is part of a continuing trend that we’ve seen since 1985,” says the NSF’s Melissa Pollak. “It’s very evident that the rate of increase has been far below what was in the early 1980s. I don’t know if it’s worrisome or not. . . . We really don’t know what to make of it.”

Of course, the early 1980s saw an explosion of capital spending, and R&D; was a beneficiary of that. As the rate of capital spending has declined, R&D; spending has tracked that as well. “If anything,” Pollak notes, “R&D; is more resistant to cuts than other sectors. . . . That’s what we’ve seen.”

The New York Times story also mourns what appears to be a decline in spending on basic research. “If you send Joe down to fix the furnace and he fixes it, that’s maintenance. If he doesn’t, it’s research,” cracks Edwin Mansfield, an economist at the University of Pennsylvania’s Wharton School who has done pioneering work in assessing R&D; productivity. “It’s difficult to distinguish between research and development.” In today’s world, the line between basic and applied research frequently vanishes; a mathematical equation can simultaneously be pure research and best-selling software.

Of course, if you really care about competitiveness, basic research is often beside the point. What matters is how well you transform ideas into profitable technologies. Mansfield’s research points out that successful Japanese technology firms spend twice as much on “process” research as their U.S. counterparts. In other words, Japanese R&D; is as much focused on how to make things better as making better things. It’s not just what you spend; it’s where you spend it. Clearly, the Japanese have gotten more bang for their R&D; buck. Why don’t we?

The bottom line is the bottom line. If top managers are cutting research funds for the sake of saving a few bucks, then they are morons who deserve every bad thing they have coming to them. But if they’re taking a moment to reassess what R&D; should mean in the 1990s, then more power to them. The real R&D; issue isn’t money; it’s brains, initiative and backbone. Some American companies still have them.