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Who Pays for Tech Innovation?

By Lisa Gill
Oct 7, 2002 4:00 AM PT

The dollars spent by tech sector heavyweights on research and development number in the billions. For example, in the semiconductor space, Intel (Nasdaq: INTC) will have spent US$4 billion on R&D by the end of 2002. The company operates more than 75 labs staffed with 7,000 researchers, and it increased its R&D spending by 412 percent between 1991 and 2001.

Who Pays for Tech Innovation?

Determining a company's return on its R&D investment is not a clear-cut exercise. Until ROI is achieved, companies often find ways to pass the costs on to consumers or suffer reduced profits.

But such outlays are necessary to nurture innovation in any company, according to IDC research director Mark Hall. He likened a business without R&D spending to a lake stocked with fish but never replenished. "You'll fish it to death, and before you know it, there won't be anything left," Hall told the E-Commerce Times.

Calculating the Benefits

As to how much money is spent by tech firms, IDC analyst Dan Kusnetzky said he believes the range is between 5 and 10 percent of a company's gross revenue, though it can change. "I don't think there is a rule of thumb that always works," he told the E-Commerce Times.

For example, IBM (NYSE: IBM) and Hewlett-Packard (NYSE: HPQ) have spent an average of 6.2 and 5 percent, respectively, of 2002 revenue on R&D so far this year, according to their quarterly and annual reports. In dollar terms, IBM invested $2.33 billion in the first half of 2002, and Hewlett-Packard spent $2.92 billion during the first three quarters of the year.

Intel has spent an estimated $1 billion and 10 years developing its Itanium chip, according to Peter Kastner, chief research officer at Aberdeen Group.

"They've had negative ROI at this point, but they look at it and say, 'This is a 64-bit, next-generation chip. This is a 10-year program.' And not too many companies anymore have a 10-year vision," Kastner told the E-Commerce Times.

10-to-1 Return

IBM's goal is to earn 10 dollars for every research dollar spent, explained company spokesperson Timothy Blair. He told the E-Commerce Times that the company has achieved its goal by streamlining its R&D process and eliminating what he called the "technology transfer" between scientists and product development teams.

"The technology devalues itself so quickly that if you can't speed it to market and gain share and get the margins when they're available, you're losing money and opportunity," Blair said. "And we've found by eliminating technology transfer we're able to speed that up."

For a company like IBM, which has more than 3,000 researchers devoted to its R&D effort, the challenge is to stay ahead of the technology curve. "The focus is on trying to invest into what's going to be hot in three to five years," Hall said.

Smaller Tech Companies

For companies that have significantly fewer resources to devote to developing new products, the federal government offers two programs sponsored by the U.S. Department of Defense: Small Business Innovation Research (SBIR) and Small Business Technology Transfer (SBTT).

Together, the two programs funded $770 million in early-stage R&D projects during 2002, and they are part of a larger $1.5 billion federal SBIR program administered by 10 agencies.

While SBIR is intended to fund R&D projects that serve a DOD goal and also have potential for commercial application, the SBTT funds projects involving a small business and a federally funded academic research institution or nonprofit center.

So, although R&D budgets and funding sources may vary depending on companies' size and scope, few businesses can afford to avoid such spending altogether. After all, R&D is the spark that fuels the engine of innovation, and new innovations will open the door for the tech industry to move beyond the recession into the next phase of its evolution.

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