The IFTF Blog
How Long Will the Winter Last for Corporate R&D?
The cash crunch is finally hitting the U.S. corporate innovation system head-on. Today's Wall Street Journal reports on a forthcoming study by the Battelle Memorial Institute that forecasts a 1.6 % fall in total U.S. R&D spending in 2009, after decades of faster-than-inflation increases. (link) It's not just the US, though - global R&D spending will faltten out in 2009.
The report is optimistic about the long-term outlook:
Jules Duga, a senior researcher at Battelle and co-author of the report, believes that any hit to research and development may be temporary.
"We've been through this sort of change in the past and returned to steady-state growth," he said. Even now, many corporations are making sizable investments. "Managers and those in the board room continue to believe in R&D -- they take a long-term view," added Mr. Duga.
I'm not sure that I'm so optimistic of US companies taking the long view, not before the crisis and certainly not now. In fact, anyone that isn't cutting deep to survive now is doing it just-in-case.
Or maybe I'm just optimistic in a different way. There are a lot of forces in motion right now that suggest that companies may make bigger structural changes to R&D as the cash crunch on corporate spending continues to play out.
Last week, the Institute for the Future conducted a workshop at the annual conference of the Association of University Research Parks. Our expert panel consisted of managers of university-affiliated research parks from all over North America, and we created a forecast map of the future of university research parks. As you can see on the map (link), the group developed two equally plausible futures for R&D.
The first future is the one described above, of short-term corporate cut-backs and a renewed focus on very lean, applied, quick to market projects. One likely outcome of this scenario is a hyper-acceleration of implementing open innovation strategies as companies desperately try to maintain current levels of innovation with smaller R&D budgets.
The other future, is a massive, government-driven investment in basic science and technology R&D. But that may take a few years to ramp up: the Batelle report actually expects federal R&D spending to decline even faster than corporate spending next year. The WSJ says: "President-elect Barack Obama has emphasized the need for greater government support for science, medicine and R&D, but the new administration won't be able to make significant changes in R&D priorities in the budget until fiscal year 2010.
Where things start to get interesting is when you realize that these trends are going to happen in parallel over the next 3-5 years. Companies will be cutting to the core, shoveling off the burden of R&D to partners in their increasingly far-flung innovation networks. Startups will be eager for direct corporate investors as venture funding dries up.
Another big piece of that network is offshore corporate and contract labs. And it's the one we know least about. As the WSJ reports, the Batelle report finds that, "U.S. industry -- the biggest source of R&D funds -- is expected to spend $257 billion next year, a decline of about 1.3% in inflation-adjusted terms. That figure doesn't include R&D investments made by American companies overseas." That number is a huge unknown. The National Science Foundation is launching its first ever survey in 2009 to try to quantify the overseas R&D spending of US firms.
At the same time, we'll see federal labs and universities take a much more expanded role in R&D, accelerating another long-term shift in where science and technology happens in the US system. Universities and their research parks seem well-positioned to channel big federal investments into industry innovations, despite their deeply flawed technology transfer mechanisms.
It's an interesting binary model, and will generate a whole new set of challenges for all involved. Will companies remain committed to long-term R&D investments when a growing array of tools let them outsource those functions, and improve performance? Will the federal government be able to inject R&D money into the right universities where discoveries can be quickly commercialized? Finally, how is the middle ground going to evolve - the incubators and research parks where startups will have to navigate a very bad market for seed funding?