One Small Step for R&D Spending

Corporate America, led by Microsoft, still dominates. But with Europe and Asia boosting their budgets, is the U.S. putting in enough dollars?

By Steve Rosenbush

Despite an iffy economy, multinational corporations slightly increased their spending on research and development last year -- a crucial growth factor for the global economy. A new survey by IEEE Spectrum magazine shows that R&D outlays at the 100 top companies rose 2.2%, to $236 billion, in 2003, the latest year for which data are available, BusinessWeek Online has learned. The IEEE Spectrum report will be released Nov. 1.

Microsoft (MSFT ) emerged as the global leader in R&D spending, according to IEEE Spectrum, which is published by the trade group Institute of Electrical & Electronics Engineers. The software giant spent an unprecedented $7.79 billion, a 17% increase over 2002.


  However, much of the gain reflects a change in accounting rules. Anticipating a new regulation that will require U.S.-listed companies to include stock options and stock grants in their R&D budgets, Microsoft adopted the new policy ahead of schedule. Most companies are waiting to implement the new rules when they go into effect in June, 2005. Meanwhile, Microsoft's early adherence to the policy will exaggerate its spending on software R&D, which still is huge by any measure.

The top 10 R&D spenders include four auto companies -- No. 2, Ford (F ); No. 4, DaimlerChrysler (DCX ); No. 5, Toyota (TM ); and No. 7, General Motors (GM ). Also in the top 10 are a couple of drug companies -- No. 3, Pfizer (PFE ) and No. 10, GlaxoSmithKline (GSK ). Three of the top 10 are focused in industry and technology -- No. 6, Siemens (SI ); No. 8, Matsushita Electric Industrial (MC ); and No. 9, IBM (IBM ).

Some former big spenders have fallen in the rankings. Telecom-equipment giant Lucent Technologies (LU ), which operates the Bell Labs' research house, dropped to 57th place this year, down from No. 36 spot in 2002. For many years, Bell Labs was famous for its pure scientific research, some of which led to major inventions such as the transistor. These days, it has fewer research dollars to invest because of troubles in the telecom market.


  Xerox (XRX ) slipped to No. 85, from 80. Its Palo Alto Research Center conducts basic research that led to computer breakthroughs such as the mouse, Ethernet, and the graphical user interface. Even IBM, which still conducts a lot of basic research, slipped two places this year from No. 7 previously.

Some problems are also simmering just below the surface. R&D spending is rising considerably faster than company sales, which increased by a paltry 0.8%. But some of the spending increase reflects the change in Microsoft's accounting policy. And worries are deepening that an insufficient amount is being spent on basic research and pure science, which often leads to major breakthroughs that power economic growth.

"More and more money is going into applied research. Companies just can't afford to do as much basic research anymore," says co-author Harry Goldstein, a senior associate editor at the IEEE.


  Universities have picked up some of the slack. But even academia is more commercially oriented than in the past, Goldstein says, a trend that got a big boost from the 1980 Bayh-Dole Act, which allowed schools to patent and license their research.

American corporations and educational institutions still account for the vast majority of global research. But other regions, such as India, China, and the European Union, are growing in importance. And that likely means they'll become increasingly competitive in drugs, high tech, and other industries where the U.S. is currently strongest.

Yes, the research dollars are rolling along. But judging from the new IEEE study, a fair percentage of them might not be rolling into the right place.

Rosenbush is a senior writer at BusinessWeek Online

Edited by Thane Peterson

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