Thinking big.

Photographer: Chris Ratcliffe/Bloomberg

The Big Spenders on R&D

Justin Fox is a Bloomberg View columnist. He was the editorial director of Harvard Business Review and wrote for Time, Fortune and American Banker. He is the author of “The Myth of the Rational Market.”
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Amazon.com and Facebook had great earnings reports this week. They also reported spending a lot of money on the future. Capital spending was up 35 percent at Amazon and 125 percent at Facebook in the first quarter compared with the same quarter last year. Research and development spending was up 28 percent at Amazon and 26 percent at Facebook.

In an age when much of corporate America seems focused on buying back shares, cutting costs and meeting quarterly earnings targets, Jeff Bezos and Mark Zuckerberg are thinking big, and long-term -- and it seems to be working out for them.

I wondered, though, whether the spending by these relatively young companies really amounts to much compared with spending by the rest of corporate America. That is, are Amazon and Facebook's investments big enough to matter to the economy?

On capital spending -- that is, purchases of land, buildings and machines -- the answer is no, not really.

Big old-line companies still lead the way in this ranking (I screened all the companies on the Russell 1000 Index) -- although Alphabet, Google's parent, does make the top 15. Amazon comes in 37th place, Facebook 67th.

But when looking at R&D -- which measures spending on discovering new knowledge and developing new products, including the salaries and benefits of those doing the work -- things are a lot different.

This time Amazon tops the list, and Facebook, which only went public four years ago, is in 17th place and on track to pass No. 16 General Electric and No. 15 IBM before long. The list has gotten techier over time. A decade ago, the biggest spenders were in autos and pharmaceuticals.

Note that today's spending totals are almost twice as big as those of 2006. That's not just inflation -- the Consumer Price Index is up only 18 percent over that period. Overall, corporate R&D spending in the U.S. is higher than ever, as a percentage of gross domestic product, Matthew Philips and Peter Coy reported in Bloomberg Businessweek last year.

It's worth highlighting that companies have a lot of leeway in deciding what to report as R&D. As the Financial Accounting Standards Board concluded many years ago:

Differences among enterprises and among industries are so great that a detailed prescription of the activities and related costs includable in research and development, either for all companies or on an industry-by-industry basis, is not a realistic undertaking for the FASB.

Amazon seems to go for a pretty expansive definition, including what it calls "content costs." Still, I don't get the sense that this skews the numbers all that much. And big R&D spending numbers have consequences. Last year, for example, my fellow Bloomberg View columnist Matthew Winkler showed that companies that invest more in R&D see faster growth in market capitalization. Meanwhile, research indicates that the overall economic gains from R&D spending substantially exceed what companies themselves reap from it.

Amazon and Facebook are spending a lot on R&D (as are Alphabet and a few other tech giants). That's good news for more than just them.

(Corrects second and third charts and seventh paragraph to include companies that do not report R&D spending on a quarterly basis in article published April 29.)
  1. Some software spending can be expensed as capital. Amazon, for example, includes "internal-use software and website development" in its capital expenditures. But in general, capex means tangible stuff.

  2. According to the company, "Content costs consist principally of payroll and related expenses for employees involved in category expansion, editorial content, buying, and merchandising selection."

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Justin Fox at justinfox@bloomberg.net

To contact the editor responsible for this story:
Zara Kessler at zkessler@bloomberg.net