Spending big on ideas pays

Wouldn’t it be nice to know that capitalism rewards the patient pursuit of great ideas? That business is better when it funds the imagination and realization of things beyond our reach?

Here’s the good news: Among large companies that spend money on research and development, bigger investments pay off. Shareholders, for the most part, get the biggest returns from the allocation of the largest percentage of corporate sales to R&D.

The link between innovation and R&D spending is complicated and contested. The skeptical view is represented by a 2011 Booz & Co. report arguing that highly innovative companies don’t necessarily invest much in research. Many successful companies don’t report any R&D expenditure at all.

Among the companies that do, there’s a link between R&D spending and shareholder value.

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Start with the Global 500, the world’s biggest 500 companies by market capitalization. Almost half of them, 239, reported spending at least something on R&D in the last three years.

These were mainly technology giants like Yahoo! Inc. and Adobe Systems Inc., science pacesetters like Vertex Pharmaceuticals Inc. and Gilead Sciences Inc., and makers of engineered products like cars, airplanes and electronics gear. Financial companies and sellers of consumer goods were least likely to report R&D expenditures.

Even where the commitment to R&D is lowest among the companies that commit to it at all, there is a difference. AT&T Inc., based in Dallas, invested just 1.13 percent of its net sales in R&D the past three years and its market cap rose a paltry 3.23 percent. BT Group Plc, its London-based telecommunications services counterpart, invested 4 percent of its sales in R&D and saw its shares appreciate 108 percent.

To be sure, not all companies that invest substantially in research and development see a corresponding benefit to shareholders. Pfizer Inc., the pharmaceutical giant, spent 14.36 percent of its net sales on R&D the past three years, and its market cap climbed only 22.72 percent in the period.

That’s an exception. Most of the big companies that invest consistently in R&D wind up benefiting shareholders. •

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