2014 R&D Trends Forecast [Research Technology Management]
(Research Technology Management Via Acquire Media NewsEdge) Results from the Industrial Research Institute's Annual Survey
IRI's 2013 trends survey results suggest a decline in optimism, as R&D leaders expect R&D spending in the coming year to flatten.
The Industrial Research Institute
Following a marked increase in R&D spending optimism in the Industrial Research Institute's (IRI) 2011 R&D Trends Forecast, the 2012 survey results showed a decline in opti- mism from the 2011 high, although projections remained positive overall. The IRI's 2013 survey results now suggest that R&D leaders are anticipating that 2014 will be a year of spending stagnation and, in some areas, decline. In their responses to this year's survey, participants reported that they expect to see an overall flattening in R&D spending expectations for 2014, with professional R&D and new graduate hiring the only categories with a visibly positive outlook. While two of the industrial sectors represented by this survey reported expecting an increase in total R&D spending in the coming year, most segments are preparing for a period of inertia or decline.
This is IRI's 30th annual R&D Trends Forecast. The survey, typically conducted in August and September of each year, asks R&D leaders about their actual activity in the past year and their expected activity and investment levels for the year ahead. It also explores the international dispersion of R&D facilities, the top concerns of R&D managers, and the top fac- tors leading to variance between actual and projected spend- ing levels for 2013. This year, the analysis is based on data from 107 respondent organizations, 87 of which are IRI member organizations and 3 of which are US federal labora- tories. Due to the changing membership of IRI and the vol- untary nature of the survey, the mix of companies represented each year fluctuates. However, we believe there are enough responses from a large enough cross-section of industries to provide reliable insight into general trends.
Profile of Survey Participants
The 107 companies participating come from diverse indus- try segments (Table 1) and are mostly medium to large cor- porations (Table 2) with annual R&D investments averaging over $50 million (Table 3). The majority of respondents have global reach; taken together, surveyed companies have a total of 240 labs outside the United States spread across 34 countries. China hosts the largest share of these labs (40), followed by Germany (25), India (19), France (17), England (16), and Canada (16).
Some respondents left some questions unanswered; the average number of responses for each question is approxi- mately 89.
Expectations for R&D Investment
The survey's principal purpose is to identify participant ex- pectations for R&D spending for the coming year compared to the previous year. The outlook for R&D spending has changed in the last year, from positive in 2012's survey to a more neutral outlook this year. R&D managers are report- ing a range of assessments from weak optimism to mild pes- simism, depending on the spending category, going into 2014; 65 percent of respondents expect little to no increase in total R&D spending while 19 percent expect a decline (Table 4). Investment in new business projects, the category that historically has seen the strongest growth each year, is now showing an almost even split, with 19 percent of re- spondents expecting a moderate increase (>5 percent) in spending and 16 percent expecting a decrease (<0 percent); the remainder of respondents expect little or no change from 2013 levels. The largest relative downturn in growth is in directed basic research, with 25 percent of respondents expecting a decline in investment and only 3 percent ex- pecting a measurable increase.
Licensing strategies for 2014 are expected to remain the same, subtly favoring growth; approximately two-thirds of respondents expect little to no increase in the dollar value of licenses they produce or acquire. Respondents also indicated that funds spent on technical or customer service are likely to remain unchanged in 2014. Finally, the data on hiring indi- cate that R&D managers are expecting moderate growth in professional R&D staff hiring (87 percent expect professional R&D hiring to increase or remain the same) and new gradu- ate hiring (84 percent expect new graduate hiring to increase or remain the same).
Trends Over Time
Comparing the results of this survey with past years' editions provides a valuable view of trends as they emerge over time. These trends are visualized via IRI's sea change index, which is calculated by subtracting the number of respondents who anticipate a negative change (reductions in spending of 0 percent or more) from the number who anticipate a positive change (increases in spending of 5 percent or more) and nor- malizing the data to a 100-point scale. The range of the index varies from --100 to +100 percent.
It is important to note that the trends visualized in the sea change index may run counter to the trends seen in the an- nual data, as the sea change index captures evolution over time rather than the snapshot provided by the annual analy- sis. Over the past three years, the sea change for total R&D spending has indicated a basically optimistic outlook, al- though the degree of that optimism has declined steadily (Figure 1). The data for 2014, however, reveal a slide into pessimism. Although more companies expect a decline in R&D spending than expect an increase, it should be noted that the bulk of respondents report little or no change.
The 2013 sea change index for total R&D spending suggests a continuation of the decline in increases seen in previous years, reducing the number of companies expecting an increase in total R&D spending and capital spending by nearly 10 percent. The uptick in the expected R&D/sales ratio, how- ever, may suggest a change of direction for many companies struggling to adjust to the changing business landscape, which other data indicate is the leading cause of the variance be- tween projected and actual R&D budgets for 2013.
Breaking total R&D spending into its constituent parts provides a detailed view of the changes taking place. The component sea change indices show where spending is changing, and how (Figure 2). For new business projects, ex- isting business projects, and directed basic research, the out- look for expected spending levels is negative or rapidly approaching negative. Investment in new business projects has historically seen strong growth forecasts, but the sea change index for this category is also down markedly, +3 from last year's +20. While investments in this category are still growing, the slowing of growth is noteworthy. Unlike the annual data, which show a more neutral sentiment, the sea change index suggests an overall decline in R&D invest- ment and a mildly pessimistic outlook.
Industry Sector Trends
Information about participants' industry segment is collected as part of the trends survey; the data is analyzed by industry segment to more closely examine where the biggest changes are taking place and which factors are most affecting which industries. To be included in the segmentation analysis, an industry sector must be represented by at least five survey respondents. This year, qualifying industrial segments in- clude chemicals, food, industrial machinery/equipment, con- sumer products, energy, R&D services, and health care/ pharmaceuticals.
The data on spending and hiring across these industrial segments largely align with the overall survey results, with a few exceptions (Figure 3, p. 36). The 2013 sea change in- dex, for example, shows total R&D spending dipping below 0, but segmentation data show consumer product and indus- trial equipment companies anticipating an increase in their annual R&D budgets. Likewise, capital spending is either negative or stagnant across industry segments, with the ex- ception of R&D service companies, which expect a modest increase.
How Did We Do Last Year?
In order to contextualize our annual forecast, we ask respon- dents about their actual R&D budgets for 2013 so that we may compare them to the responses from last year's survey. Almost half of the respondent companies (48 percent) saw no difference between their actual and projected 2013 R&D spending, but almost a third (31 percent) reported that actual budgets were lower than forecasted.
To help explain such variance, we asked respondents to identify the top three factors affecting budget changes. Among the top reasons given, the most important was changing busi- ness conditions (Figure 4). Schedule delays; strategy changes; and a change in emphasis on growth of new products, pro- cesses, or services also emerged as leading reasons for budget alterations. Analyzing this data across industry segments shows a similar breakdown, but with more weight given to changing business conditions than is seen in the overall view (Table 5).
While anecdotal data is typically not as useful for such an analysis, several comments made by survey participants give weight to the role of a volatile business environment in R&D spending changes. Several participating companies get part of their budgets from the US Congress; representatives of these organizations reported that budgetary battles have wrought havoc on R&D planning. Additionally, one com- pany and two of the participating federal labs noted the im- pact of sequestration on their 2013 budgets. More than one consumer product company said that the globalization of product lines, which altered regulatory compliance codes, made long-term planning more difficult, while several other respondents across industries remarked upon the increasing speed-to-market demands placed on R&D companies by the current business environment. Taken together, this data, and the anecdotal comments that accompany it depict a market that is becoming increasingly unpredictable just as the availability of financial resources is diminishing.
We asked respondents about their projected spending on a range of external collaboration approaches (Table 6). Vi- sualizing this collaboration data on a sea change index re- veals that external collaborations continue to experience positive growth, albeit with a downturn in expectations from last year's results (Figure 5). One area worth highlighting is expectations for contracts with federal labs. The collabora- tion index rarely sees a category dip below zero; however, expectations for contracts with federal labs have dipped to --2 for 2014, indicating a radical shift in outlook for the US federal lab system. Participant comments regarding seques- tration and Congressional budget battles may help explain some of this unprecedented pessimism. Respondents seem to be looking to other avenues for collaboration. Participa- tion in alliances and joint R&D ventures remains the stron- gest growth category for the sixth consecutive year, with acquisition of technological capabilities through M&A run- ning a distant second over a similar period.
Analyzing collaboration data across industry segments re- veals some interesting differences from the overall picture in some industries (Figure 6). Expectations for grants and con- tracts for university R&D, for instance, shows positive senti- ment overall, but most of our industry segments show an unfavorable outlook in this area. Contracts with federal labs are expected to fall, but only two of our seven indus- try segments anticipate such a decline. Moreover, while participation in alliances and joint R&D ventures is expected to see the greatest growth of any category of collaboration activi- ties in the overall data, consumer product companies reported an overall decline in this category for 2014. Such data only strengthen the impression of a neutral sentiment, with mild optimism in some categories and sectors balanced by pessi- mism in others, running through this year's analysis.
To track shifting global investment trends, we ask survey re- spondents where their R&D facilities outside the United States are located. Approximately 77 percent of respondents indicated that their organizations have R&D facilities outside the United States, primarily in western Europe and east and southeast Asia (Table 7); participating companies spend between 0 and 25 percent of their R&D expenditure outside the United States (Table 8).
The number of countries in which these labs are located has diminished since 2013, with six countries dropping from the list (South Africa, Poland, Czech Republic, Israel, Argen- tina, and Romania) and only one (Austria) being added (Table 9). Some countries that saw a decline last year have seen some resurgence this year, Spain and Italy chief among them, with Taiwan and Denmark receiving slightly higher investment than previously. England, however, experienced a moderate decline, from 24 to 16 labs. With the exception of these outliers, international R&D investment seems to have leveled off, with minor declines almost universal.
Each year we ask R&D managers to rank their top concerns. Starting in 2012, we eliminated two of the most common categories from the list of available options ("accelerating in- novation" and "growing the business through innovation") as too universal-since these are the primary function of those filling out the surveys, and thus the obvious choices, they repeatedly dominated responses, making it difficult to identify emerging or evolving concerns. At the same time, respondents were asked to rank their top three concerns instead of their top two. The result is a much more refined picture of what keeps R&D managers up at night (Figure 7).
In this year's data, respondents reported an overwhelming concern with balancing their organization's short- and long- term R&D objectives; this item beat all other categories by a wide margin. Attracting, developing, and retaining talent dropped from second place in the 2012 survey to fifth place in 2013, while building and maintaining an innovation culture, integrating technology planning and business strategy, and identifying disruptive technologies moved higher on the list of concerns. Respondents also expressed increased concern about measuring R&D processes, outputs, and outcomes, moving the category from eighth place to sixth place this year.
To provide better insight into this aspect of our analysis, we segmented the data on top concerns by industry. In general, industry-specific concerns line up relatively well with the overall trends (Table 10), but there were some interesting highlights. For instance, the need to integrate technology planning and business strategy is more important for specific industries than for the sample as a whole, with R&D service companies ranking this concern higher than the rest. We also see a much greater concern for complying with regulatory changes among consumer product and food industries, espe- cially those having global supply chains.
US Competitiveness and Innovation Policy
As part of its most recent mission statement, IRI published a call for the US Office of Science and Technology Policy (OSTP) to implement a national innovation program similar to the Healthy People initiative housed under the US Department of Health and Human Services, to be called In- novation Economy 2020. IRI president Ed Bernstein high- lighted this program, and its perceived need, to our membership at the Diamond Jubilee in May 2013.1
As part of this year's survey, we included two questions aimed at helping determine R&D leaders' awareness of the strength of this need (Table 11). However, just under half of survey participants answered these two questions, possibly due to an unwillingness to speak for their organization on matters of policy. Whatever the reason, this section received the fewest responses of all others in the survey. The first ques- tion asked respondents whether they agree with the statement "The US is well equipped to compete in the global innovation market." Among those who responded to this question, 86 percent agreed or strongly agreed and 14 percent disagreed. The second question asked about the importance respondents placed on IRI's call for an Innovation Economy 2020 program; 68 percent of respondents saw it as important or very impor- tant, while only 8 percent said it was not important at all.
On the whole, R&D managers appear to harbor mixed senti- ment about R&D spending going into 2014. Year-over-year data suggests a consistent downward trend, with outlooks inching toward pessimism in some areas. New business projects remain a key driver of investment, as they have been in the past, but this year's data suggest a sizeable decline in support for this area. Meanwhile, the positive forecast in collaboration efforts supports the notion that companies are continuing to participate in coordinated research initiatives and alliances, boosted by open innovation programs. The negative showing on the collaboration index for contracts with federal labs is somewhat disconcerting, but given the political climate in Washington, this development is not surprising.
On a brighter note, hiring expectations for both R&D pro- fessionals and new graduates appear to be surging across al- most every industry segment. The overall picture seems to suggest that each industry segment is facing unique challenges, and spending expectations remain relatively flat. If the down- ward spending trends seen since 2011 continue, however, we may see a more uniformly pessimistic outlook by 2015.
Special thanks to Greg Holden, Business Writer and Social Media Manager at IRI, for compiling this report, and to Lee Green, IRI's Senior Director of Research & Thought Leadership, for distributing and collecting the survey and its results.
The Industrial Research Institute (IRI) brings together companies and lab- oratories from around the world to seek, share, learn, and create best prac- tices and policies in R&D and innovation. IRI is the only cross-industry association of R&D experts in the United States and has been publishing this trends survey for 30 years, one of the longest running and most reliable forecasts of its type. For more information about IRI, visit www.iriweb.org.
Research-Technology Management seeks submissions
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Research-Technology Management seeks submissions
Research-Technology Management is seeking articles that connect theory to practice in the management of innovation.
RTM is actively seeking articles that map the cutting edge in R&D management, illustrate how management theory can be applied in real situations, and give R&D managers the tools to promote innovation throughout their organizations. We are interested in case studies, practical models, frameworks, and tools covering a wide range of issues in innovation and technology management. We are particularly interested in articles about open innovation, design-driven innovation, user- centered innovation, and other trends in innovation strategy and R&D management. In this, IRI's jubilee year, we are also seeking articles exploring the future of innovation and how emerging trends may shape innovation in coming years.
RTM articles are concise and practice centered. The ideal submission provides concrete examples and real data to support theories about invention and innovation, the management of capabilities to support innovation, or the process of portfolio selection. Successful submissions will offer readers practical information they can put to work immediately.
We prefer submissions at around 3,500--4,000 words, although we will occasionally publish truly groundbreaking pieces as long as 5,000 words. For more information, including author's guidelines and submission requirements, visit us at http:// www.iriweb.org/RTM.
We are also soliciting submissions for upcoming special issues on Design and Consumer Insight and Intellectual Property Approaches for a New Era. Please see the website or contact the Managing Editor for details.
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Global Innovation Strategy. This issue will focus on approaches to managing global innovation structures, including insourcing, outsourcing, or rightsourcing; chall enges in knowledge man- agement across a distributed innovation network; and recent developments in localized innovation and manufacturing.
Driving Cultural Transformation. Whether it's open inno- vation, portfolio management, or customer-centered inno- vation, implementing a new innovation framework means changing the organization's culture. Rather than particular frameworks, this issue will focus on the underlying issues that frequently lead good initiatives to fail: How do you change culture to support change?
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1 IRI's Innovation 2020 position statement was published in RTM in May 2013; see "Innovation Economy 2020: IRI Position Statement on U.S. Economic and Technology Policy," RTM 56(3), pp. 13--14.
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