The price of success

July 16, 1999

Although R&D is vital to the bottom line, many British companies seem still not to have got the message. Martin Ince reports

Are British companies finally getting enthusiastic about spending money on research? Latest data on company research spending suggest that maybe they are.

One of the United Kingdom's leading innovation watchers, Rod Coombs, a professor in the Manchester School of Management at UMIST, notes that there are some exceptions to the generally gloomy picture of British corporate research spending. The most frequently cited high spender is the pharmaceuticals industry, but Coombs says that it is not just its spending that marks it out.

Firms that are good at innovation, he says, are ones in which innovation is visible and where it is fully integrated with business strategy. It is high on the agenda for directors of a firm, not just the subject of a technical report in the dying minutes of a board meeting.

The Department of Trade and Industry's latest R&D Scoreboard, which sets out research spending by British and overseas firms, shows that UK spending has gone up but that British firms are still well behind the 5 per cent of turnover spent on research by the world's top 300 firms. In the UK, the figure is 2.1 per cent for the top 100 firms and 1.3 per cent for the next 250.

Coombs says that the Technology Strategy Forum, a Manchester-run group of which he is one of the directors, has been pointing to the need for research directors to "tackle the levers of power" in their own firms. The 28 companies involved are responsible for about half of the UK's private research.

He says: "The government has a policy of trying to build up small firms. But in fact these are the companies least affected by what government does. It would make more sense to try to influence the big companies that are the main customers for smaller ones."

As Coombs sees it, the increases in corporate research spending that we now see are merely restoring cuts made in the late 1980s, in which private research is being restored to the level of about 2.5 per cent of gross domestic product that it had reached previously.

For this reason, Coombs says, it is difficult to take too seriously the argument that a voracious UK stock market discourages research spending in favour of instant dividends. After all, the same problem does not exist in the US, where investors are no less keen on profit, while Japanese and continental bourses are getting more like the British one under current reforms.

Indeed, although British investors are responding favourably to moves to make them look more kindly on long-term investment, especially in research, the real problem is the structure of the UK economy in general, which is tilted towards low-research, low-technology firms.

But Coombs points out that company managers do not operate in a vacuum. The existence of the Scoreboard itself encourages firms to look to their research spending, as do efforts by the DTI to enthuse company chairmen about research by putting them in touch with examples of good practice.

But he adds that entreaties on the need for more research spending may be reaching the end of their usefulness. While there is support for firms declaring their research spending in their annual reports, he thinks that it might be more useful to make them list their entire spend on "innovation", which could include market research, design and other areas.

Coombs says: "There is no doubt that UK firms are less competitive and less profitable than firms overseas, and this has got to have something to do with their low research and development spending." The real question is how to make them realise the connection between research and business success, and putting the debate in terms of innovation might be one way to do it.

Coombes adds that another sector of the British economy whose competitiveness is doubtful is universities. "Ten years ago firms spent about 5 per cent of their research budgets with external contractors," he says.

"Now the total has risen to about 10 per cent, but private sector laboratories and organisations seem to have been the main ones to gain."

DRUG GIANTS TOP UK R&D SPEND

The United Kingdom's top research spenders are pharmaceuticals giants Glaxo Wellcome (Pounds 1.1 billion in 1998), SmithKline Beecham (Pounds 910 million) and AstraZeneca (Pounds 708 million).

The R&D Scoreboard shows that the UK is regarded as a useful site for research by many overseas firms, including Ford, IBM, Motorola and another drugs group, Pfizer.

But few British firms are major research players by comparison with the world industry of which they form a part. British Aerospace is fifth biggest spender in the aerospace industry, spending about 40 per cent as much as industry leader Boeing. But in the automotive industry, only one British firm appears, GKN, at 24th. In construction, Pilkington is being outspent by Japanese and French competitors, while in electronics and electrical goods, only one British firm appears, GEC, which spends about a tenth as much as its German competitor Siemens.

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