Why some companies pour over 40% of revenue into research
A typical American industrial firm spends around 3.5% of its revenue on research and development. Drugmakers such as Merck and Novartis spend about 14 to 15%, Ericsson almost 25%, and the biotech firm Allergan once topped the table at 43.4%. Such heavy bets are made with no promise of success.
R&D is unlike most corporate work because it is not meant to pay off quickly. Researchers, by definition, do not know in advance how to reach the result they want, so bigger budgets do not guarantee more creativity, profit or market share. A project can fail and leave nothing of value. It also attracts predators: a firm rich in new technology becomes a tempting takeover target. Companies can reduce the uncertainty by licensing know-how from others, though studies suggest bought technology works best alongside in-house research rather than instead of it.
Over time, steady investment tends to pay. Research from 2000 found that firms with a persistent R&D strategy beat those that spent irregularly or not at all, and the link between research and productivity is much stronger in high-tech firms. Even low-tech companies benefit, since research improves their ability to absorb ideas from around them. Measuring all this is tricky; patents miss many kinds of innovation, and knowledge leaks between firms.
Governments are big players. The US spent $937 billion on R&D in 2023, most of it on experimental development rather than basic research. In the 2020 federal research budget of $156 billion, over 41% went to defence. Worldwide, research made up an average of 2.2% of GDP in 2015.
Europe set a target of 3% of GDP by 2020 and missed it. By 2023 European firms made up 18% of the world's top 2,500 corporate research spenders but only 10% of newcomers to that list, against 45% from the United States and 32% from China.
Source: Research and development
