R&D Spending: 'Investment' vs. Expense

May 7, 2014 | Contact Author | By: Rachel L. Grabenhofer, Cosmetics & Toiletries
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Title: R&D Spending: 'Investment' vs. Expense
R&Dx investmentx innovationx L'Orealx Googlex Applex
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Keywords: R&D | investment | innovation | L'Oreal | Google | Apple

Abstract: It's not news that top-performing companies are putting resources into R&D. Interestingly, however, according to the U.S. Commerce Department, if R&D spending were treated as an investment rather than an expense, the overall growth of gross domestic product could be much higher.

It's not news that top-performing companies are putting resources into R&D. Last October, Thomson Reuters announced its Top 100 Global Innovators of 2013, and many on the list were not all that surprising; AT&T, Apple, Google, Ford, L’Oréal and Microsoft were among them. According to the report by R&D Magazine, "Proof: R&D Pays Off," to derive this list, Reuters looked at companies that filed patents and analyzed those having 100 or more unique inventions within a three-year period. Factors considered were not only the number of inventions, but also the success of grant applications, the global nature of patent portfolios, and the potential to influence future innovation.

These factors were cross-referenced with a financial analysis of how the companies performed year over year. Within the past three years, the Reuters top 100 outperformed on the Standard & Poors (S&P) 500 stock market index in several areas. In 2013 specifically, they outspent the S&P 500 by 8.8% on R&D and also outperformed the S&P by 4% in annual stock gains and 2% in year-over-year revenue.

The U.S. government blog The Hill notes that the future of American innovation and global competitiveness depends on "permanent patriotic commitment to scientific research and technological development." In relation, government policies and national investments help companies to take risks, explore new areas and invest in technologies that can take years to realize.

Interestingly, however, the U.S. Commerce Department reported that if companies treated R&D spending as an investment rather than an expense, overall numbers for gross domestic product (GDP) could be much higher; on average, 2.7% or $301.5 billion greater, over the period from 1998-2007. It is also estimated that business investment in R&D already had a significant contribution to economic growth over the same period—about a 4%, compared with tangible investments such as office buildings and other nonresidential structures, at about 1%.
 
As explained by the Commerce Department, "if R&D was treated as investment, GDP per capita would increase by an average of about $1,000 over the period." And additional research suggests “spillover effects” of R&D spending are at least as large as direct returns. Cosmetic scientists, and other scientists in general, are likely pleased with these facts, as they support that internal desire to advance product development by researching the science. Although many are pinched for time in this fast-paced, competitive industry, time itself must be factored into management's R&D investment equation.
 
Resources are out there to maximize what time is allotted for research. For example, the content produced by Cosmetics & Toiletries (C&T), or education provided by the Society of Cosmetic Chemists. Also, the new C&T Research & Discovery Summit — learn more about this uniquely optimized event format at Booth 1018 during Suppliers' Day next week.