Management Case Studies
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Research and Development in a Tough Economy
| Do You Spend Now or Wait Out the Downturn? | |
| posted 05-31-2009 |
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 In March 2009, computer software maker Adobe Systems Inc. announced it had cut its research and development spending by 10 percent for the year. Adobe’s decision is just one answer to the question facing many companies in this economic downturn: “Where do we trim the fat?” Like Adobe, some companies might see R&D as a good place to cut back, but is this the best place to reduce spending? What are some other industries are planning for the year ahead, and what are the benefits of R&D spending? What’s to come: R&D spending forecast “Unfortunately, as a function of the depressed economy, R&D is one of the first things to go,” says Jon Fisher, a Silicon Valley entrepreneur and analyst, though he stresses there are some companies, such as Intel, who are keeping R&D spending steady. That company’s numbers for R&D spending during the past three years are $5.7 billion in 2008, $5.8 billion in 2007 and $5.9 billion in 2006 (numbers not adjusted for inflation). Fisher says that when companies cut back on R&D, the biggest hit to the industry is the potential loss of future talented workers. “These 10 and 20 and 30 percent reductions in force are very tough for the industry,” he says. Marty Grueber is a researcher at Battelle, a non-profit science and technology enterprise that explores emerging areas of science, develops and commercializes technology and manages laboratories for customers. Grueber and Fisher both predict a positive outlook for R&D spending in the medical field, but they also agreed there are some industries where R&D spending will decline. “There has been some cutting back,” says Grueber. “The automotive industry is the easy example these days.” In October 2008, GM announced it was postponing product development funding for 2009 and 2010. As a result of this downturn, the British International Motor Show, where some of the newest automotive innovations from around the world debut, has cancelled its 2010 show due to the economic climate. On the up: making the case for R&D spending Companies such as Adobe, which chose to cut R&D spending, may be missing out on opportunities when the economy bounces back, says Dana Cruikshank, National Science Foundation spokesperson. “The case for R&D spending is pretty strong. The products that we’re enjoying this year, the really hot stuff, such as the sales of the [revamped, second generation] Kindle … the investments into R&D for those were made five or six years ago, so in some ways not funding R&D is like reducing your seed corn,” says Cruikshank. “When people are ready to start buying again, the question is: Will companies have those innovations?” Despite the troubled economy, Fisher says the ability for small companies to innovate is prime in the current climate. “The costs of technology are lower than ever before. You can have two university students write some code, or they can write a couple of applications and sell it to the iPhone store,” he says. Fisher adds there are certain industries where research and development would be most conducive at the moment, especially if taking into account current government financial benefits. “In the current stimulus package, there is roughly $30 billion to put all medical records online in the next five years,” Fisher said. “That is definitely incentive for some companies to innovate.” But when private sector companies do scale back on R&D to maintain profit levels, government entities such as the National Science Foundation often pick up some of the slack. Cruikshank says the National Science Foundation provides grants to entrepreneurs who need cash to invest in their R&D projects. And the NSF is more likely to fund R&D projects that might not have obvious market potential, but instead may someday to benefit society as a whole. One example of this type of NSF funding was the money invested for R&D into the principles of magnetic resonance imaging. “This was something that wound up being profitable but didn’t seem that way at first,” says Cruikshank. “This was the technology that went into developing the MRI machine. Back in the day, the private sector didn’t see a reason for figuring that stuff out, but we did. And once those basic discoveries were made, private sector companies could take that research and go further.” Finding funding: Where to locate R&D opportunities Grueber adds that publicly funded R&D ventures are more likely than privately funded R&D ventures to go toward projects that have a social welfare slant. “The extensive university and federal government investments in R&D can easily be inclined to be in terms of higher purpose and social activities,” he says. Grueber adds that medical treatments and cures are a good example of government involvement. “Universities do the lion’s share of the legwork in finding therapies and diagnostics and cures, and then the end bit gets done when one of those products is licensed to a pharmaceutical company.” Statistics: A look at the numbers When it comes to the global marketplace, the United States has historically been a leader in R&D investment, while consistently providing nearly 40 percent of R&D spending in the world. But that percentage is declining, according to the “Global R&D Funding Forecast,” a yearly publication researched and written by R&D Magazine and Battelle, an American non-profit that focuses on business innovation. According to their projections, the U.S. will provide 38.2 percent of all global R&D spending in 2009, a number that is down from 39.1 percent in 2007. Despite the U.S.’ slightly slower rate of R&D investment growth, Grueber says R&D spending is usually a steady number that does not fluctuate heavily. “It’s pretty stagnant right now in the U.S., but nothing has fallen off the cliff. It’s a slow sort of evolutionary movement. It doesn’t drop off by 15 or 20 percent a year. It fluctuates up or down a couple percentage points a year.” With that steady outlook, researchers and entrepreneurs can take actions into their own hands by searching out funding opportunities, adds Cruikshank. Fisher says that while Fortune 500 companies might be cutting their own R&D spending, they are continuing to invest in and purchase start-up companies that provide promising new developments. ______________________________ Research and development: programmable matter Dov Isaacs, principal scientist for Adobe Systems ______________________________  COMMENTSWith the National Science Foundation receiving a recent extra influx of $3 billion, now is the time to think how your graduate research can effect change. Pitch an idea to the National Science Foundation, and put your personal R&D to work. Go to http://www.nsf.gov/funding/ to find funding opportunities. Leave your response in the comments below. |
