With each passingyear , the United States has lost its edge, a
new report suggests.
Whether it's national education scores, health care
efficiency, environmental stewardship or a host of other
measures, the country has slipped down from the top of the
But by one key measure, Americans can still take a great deal
of pride: innovation.
U.S. firms continue to garner the most newpatents every year,
and U.S.-designed products -- from
Apple's (Nasdaq: AAPL)
General Electric's (
locomotives to promising new cancer drugs -- continue to rack up
robust globalsales .
The notion that the United States has stoppedinvesting in the
future is simply a myth. Sixty years ago, spending on research
and development (R&D) by U.S. companies equated to roughly 2%
of gross domestic product. Today, that figure is closer to 3%,
according to the U.S. National Science Foundation (NSF).
According to the NSF, R&D spending has tripled since
(I recently wrote about the best patent-owning U.S. companies,
which alsoprofit from R&D, and you can read about it
Not only does innovation help beef up U.S. exports, but it has
also proved to be quite fruitful for investors.
In a broad multidecade study,analysts at Merrill Lynch found
that companies that pursue high levels of R&D outperform
their peers by roughly 10 percentage points each year. They add
that companies spending up to 30% of sales on R&D are
typically wiseinvestments , but companies that spend more than
60% of sales on R&D have been generally poor investments.
High levels of R&D might be necessary just to survive.
Johnson & Johnson (
spent $25 billion in R&D in 2012, according to Booz & Co.
Yet their sales are barely growing as existing drugs losepatent
Still, there are companies seeing huge payoffs from high
levels of R&D.
Google (Nasdaq: GOOG)
, for example, used to spend $3 billion a year on R&D but
shelled out $6.6 billion in 2012. Google's current $257
billionmarket value would never have happened if it chose to
skimp on basic new product research.
Of course, today's globally interconnectedeconomy can bring a
threat to innovation. A wide variety of U.S. companies operating
in China have expressed frustration that key pieces of their
intellectual property are being stolen by domestic rivals.
Several of these U.S. companies have decided to pull up stakes in
China, deciding that the loss of their intellectual property
isn't worth the benefits of exposure to the Chinese economy.
Indeed, the fears about China's huge R&D spending
increasingly appear unfounded, as Chinese engineers appear to be
developing "me too" designs rather than producing true
innovation. After a 100% jump in five years, China now generates
more patent applications than the United States, "but despite
this rapid growth, the U.S. has maintained its lead in the number
of actual patents granted, suggesting that the quality of the
Chinese patent applications may not be as high," said Merrill
Automakers take a different approach with their business in
China. They roll out new models in their home markets and then
eventually transfer all their tooling equipment to China when the
next-generation designs are ready. Many new Volkswagen sedans
plying the streets of Beijing are actually based on 5-year-old
Still, the Volkswagen example is instructive. That company is
investing huge sums into R&D, and as a result, Volkswagen
brands -- including Audi, Porsche, Lamborghini and Bentley -- are
delivering a broad set of new technologies in mainstream cars.
The 2014 Volkswagen Golf, for example,will have a number of
safety, weight-saving and performance technologies that didn't
even exist five years ago.
Here in the U.S., there is a clear pack of leading innovators,
especially in technology and biotechnology.
Let's look at biotech as an example. I went looking for
biotech and medical technology firms that spend at least 25% of
their current sales on R&D, have at least $200 million in
annual sales and are expected to boost sales at least 20% in
Clearly, the high levels of research are paying off, and many
of these companies now face considerable export opportunities in
addition to their domestic sales opportunities.
Even in other sectors, companies are making huge bets on
R&D. Using the same criteria noted above (high R&D
spending as a percentage of sales, rising sales growth, etc.), I
came across 10 companies that are stepping on the gas.
Risks to Consider:
Heavy R&D spending doesn't ensure a solid payoff.
Facebook (Nasdaq: FB)
, for example, has hiked R&D spending from about $300 million
in 2010 to roughly $1.4 billion in 2012, and that figure will
likely exceed $2 billion this year. Investors are still waiting
to see how that will pay off, asshares have been stuck in the
mid-$20s throughout much of 2013, even as the broadermarket has
Action to Take -->
The analysis of a company's R&D efforts can be especially
helpful when comparing companies within a particular industry. If
two companies have similar financial profiles but one company is
making a much larger commitment to R&D, then it is likely to
be the better long-terminvestment .