In today’s competitive landscape, innovation is often seen as the key to accelerating growth. However, questions persist about exactly how impactful innovation investment is and how companies should approach it.
How much should we invest in Research & Development(R&D) and new product development? What kind of returns can we expect on that investment? Ultimately, does investing in innovation actually drive tangible growth?
By thoroughly analyzing financial reports from Companies House of over 150,000 UK companies across diverse industries since 2013, some compelling trends emerge around R&D spending and its impact on performance that can answer the questions above.
We analyzed just over 6,500 companies that have declared R&D investment in their filings to Companies House, totalling £203bn in R&D spend since 2013.
What is R&D Investment?
R&D Investment might cover a range of functions, including staff costs, subcontractors linked to the R&D, consumables used in R&D development, and prototypes developed in R&D. A tax expert is recommended to help in identifying the appropriate allowable expenses for R&D.
The Levels of Innovation Investment
Looking at the past decade of data, the average R&D investment as a percentage of sales is 2.7% across all reporting companies. The median spend is slightly lower at 2.6%, indicating a few big R&D investors pull up the average.
These figures represent a substantial amount of money being put towards discovering new products, services and process improvements. For a company with £100 million in revenue, an R&D spend of 2.7% would equal £2.7 million per year.
However, investment levels vary widely by industry. Some sectors like pharmaceuticals, technology and telecoms invest heavily in R&D. More traditional manufacturing industries see rates at the average level of circa 3% of sales.
Investment also fluctuates year to year, likely tied to broader economic conditions as well as tax policy and accounting guidelines. The highest average rate reported was 5.2% in 2020. The lowest was 1.3% in 2014, probably reflecting caution coming out of the financial crisis.
But since 2014, rates have risen steadily, even during Covid-19. This indicates innovation investment is relatively immune to economic cycles.
The Growth Impact of Innovation Investment
Critically, the data shows investing in innovation pays off in more substantial growth. Companies reporting R&D spending in 2013 ultimately grew Turnover 12% more over the next ten years compared to non-reporters of R&D. So investing in innovation drives sales growth.
Their profit growth was even more impressive at 33% higher than companies that did not disclose innovation investments. Since the growth is higher in profitability than Turnover, it indicates that companies that report R&D investment are able to grow not only sales but also at a marginally higher price, lower cost or a combination of the two to have higher profits. Higher prices could come from entering into new markets that have a higher average price or developing more premium products in existing markets that can command higher prices – innovation solves a problem for companies who can’t pass through price. Lower costs can come from innovation that improves productivity or simplifies a process, stripping out wasteful excess costs.
It should be noted that we are making the comparison between those that report R&D and those that don’t report R&D, as a company that does not report their R&D investment to Companies House may still invest in innovation. There are many indirect reasons for declaring R&D spending publicly, such as influencing shareholders or prospective shareholders on the long-term success of a business, recruiting talent to an organization by publicly committing to a level of R&D, and compliance with industry regulations. There are many reasons not to declare R&D spending publicly, such as not disclosing an essential piece of data to the competition.
So, for established companies looking to accelerate growth, increasing innovation investment appears to be an impactful strategy. Even a tiny boost of 1% of sales directed to R&D could make a meaningful difference in performance.
Which sectors are investing the most in R&D
Since 2013, the following sectors have reported the highest levels of R&D as a percentage of Turnover.
- Growing of tropical and subtropical fruits
- Publishing of consumer and business journals and periodicals
- Manufacture of motorcycles
- Activities of venture and development capital companies
- Manufacture of batteries and accumulators
- Activities of patent and copyright agents; other legal activities n.e.c.
- Radio broadcasting
- Business and domestic software development
- Technical testing and analysis
- Manufacture and processing of other glass, including technical glassware
Focusing solely on manufacturing, since 2013, the following manufacturing sectors have reported the highest levels of R&D as a percentage of Turnover.
- Manufacture of motorcycles
- Manufacture of batteries and accumulators
- Manufacture and processing of other glass, including technical glassware
- Butter and cheese production
- Manufacture of weapons and ammunition
- Building of ships and floating structures
- Manufacture of communication equipment other than telegraph, and telephone apparatus and equipment
- Manufacture of industrial gases
- Manufacture of explosives
- Manufacture of air and spacecraft and related machinery
Unlocking the Potential of Innovation Investment
Of course, simply spending more on R&D won’t guarantee results. How a company invests is crucial.
True innovation leaders focus on thoroughly understanding customer needs, generating ideas, rapid prototyping and testing, and continuous improvement. They embed innovation into their culture.
Adequate budgets to fuel R&D are invaluable. The data clearly shows market leaders consistently invest more in discovering new possibilities.
Unlocking Innovation with Creating Possibilities
Creating Possibilities is committed to helping companies invest in innovation in the most thoughtful way possible. Our agile, consumer-centric approach ensures that R&D drives real growth.
We can help define where to invest in innovation and how to invest in it. We can discover new insights in new markets, create new ideas and concepts, and develop new brands or new marketing claims. Whether it is a fully-fledged innovation or a product extension, we can help
If you want to learn more about how to maximize return on innovation investment, our experts are here to help. Reach out today to start a conversation and take the next step towards elevating your business.