Key Points

R&D: the global picture

1. The business climate for R&D-active companies continued to improve in the period covered by the Scoreboard, with increases in overall sales growth, profitability and R&D levels for the top 1000 companies across the world. Growth in all three measures was stronger in the Americas than in the Asia-Pacific region or Europe. The United States continues to be the strongest R&D nation with 6 of the top 15 biggest R&D investing companies; Europe collectively has 5. The USA also has 11 of the top 15 larger companies by R&D intensity (R&D as % sales); Europe has the remaining 4.
   
2. R&D is still overwhelmingly concentrated in the largest countries, sectors and companies:
   
   
   • 86% of total R&D in the Scoreboard comes from just 6 countries out of 36;
     
   • 82% of R&D is in the top 7 sectors out of 31; and
     
   • 64% of R&D is done in the top 100 companies of the global 1000.
     
   This concentration means that country or sector changes can be dominated by changes at a few large companies.
   
3. For countries, the Scoreboard identifies significant growth in R&D from South Korea and Taiwan, which now contribute 33 companies to the global 1000. With firms like Hyundai (R&D of £976m, double the previous year’s) and Samsung (R&D of £2.5bn, up 37%) now major R&D investors, South Korea is the eighth largest country in the Scoreboard and is growing its R&D faster than any other significant R&D country. So far, the Scoreboard has found no evidence of substantial R&D spending in Chinese or Indian companies.
   
4. Pharmaceuticals and automotive R&D are increasing. Amongst the top five sectors, pharmaceuticals had the largest increase over the previous year with 10% followed by automotive with 7%. In automotive, 70% of the increase was contributed by 5 companies out of 68, Hyundai having the largest change.
   
5. The Scoreboard also looks at countries’ R&D vigorous companies (R&D Global 1000 companies with sales up to £500m and R&D intensity of at least 4.5%). The USA has the highest proportion of its companies (38%) in this growing middle-sized catergory followed by the UK with 22%. This reflects US and UK vigour in the highly R&D-intensive sectors of pharmaceuticals, IT hardware and software. This is confirmed by a comparison of US,UK and EU ex UK companies with very high R&D intensity and by UK data in key point 7.
   
   

   The importance of sectors

6. The major R&D nations have different R&D sector specialisations, with the USA strong in IT hardware, software and pharmaceuticals, Japan in automotive and electronics, Switzerland in pharmaceuticals and the UK in both pharmaceuticals and aerospace. The proportions of large companies in R&D-intensive sectors such as these, or in lowintensity sectors such as oil & gas, mining, utilities and telecomms, are quite different between countries. Japan and Germany are R&D specialists: they have more than twice the proportion of companies in the R&D Global 1000 than they have in the FT Global 500 list of the world’s largest companies; Canada, by contrast, has only one third as many R&D Global 1000 companies as FT Global 500. The US has similar proportions in both lists and the UK, with its strength in financial services, resources and retailing, has a 50% larger proportion in the FT Global 500. The UK is thus a value specialist with a high presence in sectors with a high wealth creation efficiency whether they be R&D-intensive (such as pharmaceuticals), Capex intensive (e.g. oil & gas) or services (e.g. financials).
   
7. The Scoreboard shows three important R&D consequences of this sector mix effect:
   
   
   • The average R&D intensity (R&D as % of sales) of a country’s major firms in the R&D Global 1000 is very dependent on sector mix. The US and Japan are very strong in high and medium intensity sectors; the US has an R&D intensity of 4.5% and Japan 4.0%. The UK’s larger presence in lower-intensity sectors (particularly oil & gas, food producers and telecomms) mean its average R&D intensity is much lower (2%) even though it has a comparable intensity in the 3 main groups of higher intensity sectors (but smaller presence in electronics & IT hardware).
     
   • The number of US patents granted per £10m of R&D varies dramatically between sectors: nine times as many patents are granted for electronics or IT hardware as for pharmaceuticals. The number of patents – often used as an indicator of innovation – is therefore highly dependent on sector mix and, contrary to the views of many commentators, not a good reflection of a country’s innovation performance.
     
   • The ratio of dividends to R&D also varies considerably between sectors, with high value/low R&D sectors such as oil & gas having the highest ratio. The UK has many companies of this type and a high dividend-to-R&D ratio. Countries such as Japan and Germany with strengths in more R&D-intensive but less profitable and lower value added sectors such as electronics and automotive, and no major oil & gas companies, have a much lower ratio. Because a country’s dividend/R&D ratio is so strongly influenced by sector mix, it is not a reliable indicator of national preference for dividends over growth via R&D or vice versa

   R&D and vigour in the UK

8. R&D decreased by 0.5% over the previous year for the 750 UK companies in the Scoreboard. This average reflects a balance between foreign-owned UK companies which reduced R&D by 3% and UK listed companies which increased it by 1%. In addition, six companies (2 foreign-owned) reduced R&D substantially; without these six, UK R&D would have increased almost 2%.
   
9. But the number of UK R&D-intensive companies increased strongly:
   
   
   • 7% more “R&D vigorous” firms. There were 116 UK-owned “R&D vigorous firms” – companies with R&D spending of at least 4% of sales and over £1m in total – in the 2005 Scoreboard, compared to 108 the year before and an increase of 32% over the 88 in 2001. 70% of the 116 are in R&Dintensive sectors.
     
   • Significant growth in middle-sized, very R&D-intensive companies. The number of UK-owned companies with R&D intensity of over 10%, substantial R&D of over £6.4m and sales of over £26m increased by 77% between the 2001 and 2005 Scoreboards.
     
   • A growing UK software sector as well as its well-established pharmaceuticals sector. The software sector contains 117 of the 750 companies and 5.2% of the R&D. Over 90% of these companies have R&D intensity over 4% and 70% of at least 10%.
   
   
10. The picture for the UK as a whole was:
    
    
    • Continued strength of R&D in key sectors such as pharmaceuticals (4% increase) and aerospace & defence, which together contribute over half of the UK 750’s R&D (52%).
      
    • Large companies dominate UK R&D. The top 25 companies accounted for two thirds of the total R&D.
      
    • There are 100 more smaller companies with R&D of at least £300k – a total of 750 compared to 650 in 2004.
      
    • UK strong in a mix of highest and lowest R&D intensity sectors. The UK has much higher proportions of pharmaceuticals, aerospace, food producers and oil & gas R&D than the global average, and much lower proportions of automotive, IT hardware and electronics R&D.
    
    
11. Foreign-owned UK companies
    
    
    • Large foreign R&D investors choose the UK. The 17 foreignowned UK companies with R&D over £50m invest 10.8% of sales in R&D, five times the average for UK-owned companies with similar R&D investment. 12 of these 17 have a much larger R&D intensity than their parent companies, i.e. they have chosen to place a high proportion of their global R&D effort in the UK.
      
    • Smaller foreign-owned companies are less R&D intensive than UK firms. There are 223 non UK-owned companies with R&D under £50m in the UK 750; these have a 12% lower R&D intensity than the comparable UK-owned companies.

    The benefits of R&D investment

12. There are well-established links between R&D and company performance: R&D intensity is strongly correlated with sales growth, wealth creation efficiency and market cap to sales ratio. The Scoreboards demonstrate that:
13. 
    
    • 81% of companies with above average wealth creation efficiency also have above average investment intensity in R&D, Capex or both (for 12 sectors where such investment is important).
      
    • 84-96% of companies with above average market cap-to-sales ratio also have above average R&D intensity (for the 3 sectors with the highest R&D intensities).
      
    • The growth in market value for the portfolio of FTSE 100 companies with the highest R&D intensities was 69% over the last 8 years compared to just 7% for the FTSE 100 index. However, company success depends not only on wise and balanced investment in R&D and other factors (capital investment, brands, skills, market development) but also on good strategic choices and operational excellence.

    Patents and R&D

14. As noted in key point 7, there are major differences in patent-to- R&D ratios between sectors. 2004 data on US patents granted to some 240 companies in 12 sectors also shows:
    
    
    • A few companies have consistently higher patent-to-R&D ratios than their sector averages. Examples are Canon and Seiko Epson in electronics, Honda in automotive and Pfizer in pharmaceuticals.
      
    • The number of larger companies by patent count in each sector tends to reflect regional strengths – the US in pharmaceuticals, Japan in electronics.
      
    • In some sectors, a few companies contribute a sizeable fraction of the 2004 patents. For example, the top 2 of 34 pharmaceuticals companies contribute 27% of the patents.
      
    • Most companies in the chemistry-based sectors (pharmaceuticals, chemicals, health) reduced their number of 2004 patents over 2003 whereas most in the physics-based sectors (aerospace, automotive, electronics, IT hardware, software) increased their patent count.

    Improvements in this year’s Scoreboard

15. The expansion to 1000 Global R&D companies (from 700) and 750 UK companies (formerly 700) allows more meaningful comparisons between major countries and allows us to extend our analysis to smaller firms (down to £22m R&D globally).