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Cover Story
 

Does R&D Really Pay?

Issue Date - 03/02/2011
 
While the CEOs of the developed countries have already learnt their lessons and are busy in rectifying their mistakes, the R&D flu seems to have spread to their counterparts on the other side of the table. Challenging the dominance of US, Japan and Germany in the field of R&D, countries like China, Korea, India and Brazil are now substantially adding to their R&D spend. A research conducted by independent research and development organisation Battelle points out, “China’s R&D investments are growing at a rate that closely matches its 9% to 10% annual economic growth.” Moreover, on a cumulative basis the companies based in India and China boosted their R&D spending by a mind-boggling 41.8% in slowdown affected 2009 (Global Innovation 1000 report).

While China has come out with all its guns blazing, India, where the record for R&D investments has not been very robust, is now aggressively desperate to give its best shot to take its R&D expenditure past the 1% of GDP mark in the near future (0.8% currently). But will not this exuberance bring in trouble for India Inc? Well, the second phase of B&E and IIPM Think Tank’s correlation analysis to decipher the impact of R&D expenditure on Indian companies’ revenues, tried to find out the answer considering the top 20 R&D spenders (as percentage of revenue) out of 116 companies who spend at least 0.1% of their revenue for R&D and are part of BSE 500 index. Interestingly, the result of the test was a real shocker. With a positive correlation coefficient of 0.4, R&D actually seemed to be helping the Indian CEOs by adding to their top-line.

The inspiring factor for R&D loving Indian companies was that though there are few cases where reduction in R&D has brought in swelling top-line, companies like Cadilla Healthcare, Biocon and GTL, which banked upon R&D for better results, were paid back in a very handsome manner. For that matter, Biocon with a CAGR growth of 1.67% in R&D as percentage of revenue, has seen its sales zooming up at over 8%. In case of Biocon, the rewards for the same growth in R&D has been far better. The company has grown at a CAGR of 11.05% since 2006.

 
However, at present Indian corporate R&D spending is by and large dominated by the pharmaceutical sector (12 out of the top 20 for example). But then that’s certainly not without a reason. Indian pharma companies have actually ripped some serious benefits out of it. Thus, presently, “India accounts for about 25% of the world’s generic drug production and has 25% of the drug master files with the US Food and Drug Administration. India also has the highest number of FDA-approved production facilities of any country in the world,” reports Battelle, the renowned international science and technology enterprise. And that has allowed the $20 billion Indian pharmaceutical market to become the third largest in the world after US and Japan.

Nevertheless, the other sectors, especially auto and capital goods (non-electrical equipments), are fast catching up in terms of R&D. With players like Tata Motors (largest R&D spender in the country – Rs.11.71 billion – in terms of absolute value of R&D investment), Mahindra & Mahindra, and Ashok Leyland now agreeing to spend over 3% of their revenue on R&D, and with industrialists like Ratan Tata accepting the fact that R&D is absolutely necessary and India Inc. is still not doing enough, the sector too looks poised to follow the pharma path soon.

But is not it that the developed countries too were this euphoric once about R&D? They were certainly in the 1980s and 1990s. And now, looking at their realisation and our statistical findings, the question that naturally comes to mind is whether the Indian R&D exuberance is irrational and temporary? Will this also follow the global trend in the days to come? Many may or may not argue on different parameters, but then they should not forget that Forbes, which obstinately tried to prove how R&D spending could lead to higher profits, had to finally accept (in August 2006) that “the world of R&D is full of questionable spending, unqualified results, and payoffs that can be hard to measure!” India Inc. too will see the day, if they don’t learn the biggest lesson in R&D from the very beginning itself and put it to a greater use. In words of one of the world’s largest spenders in R&D, Apple’s CEO Steve Jobs (said to Fortune in 1998), “Innovation has nothing to do with how many R&D dollars you have. When Apple came up with the Mac, IBM was spending at least 100 times more on R&D. It’s not about money. It’s about the people you have, how you’re led, and how much you get it.” If India Inc. fails to go by these wise words, and just keep spending on the name of R&D aimlessly, then sooner or later, some study will surely end up finding how corporate India researched & died.

          

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