Previous R&D Scoreboards have referred to evidence about the link between investment in R&D and business performance
As part of the preparation for this R&D Scoreboard, an econometric/ statistical analysis has been undertaken using the Scoreboard dataset to examine whether there is evidence of a statistical relationship between investment in R&D and business performance.
The analysis focused on considering whether changes in business performance over the last five years – as measured by sales growth, profitability and stock market capitalisation – could be explained in terms of changes in investment in R&D over the same period, and other factors captured in this year’s Scoreboard database.
Despite extensive analysis, no statistically significant relationships were found.
To some extent this is not surprising because:
- there may be long lags between changes in investment in R&D and subsequent company performance;
- the effects work at levels within companies that cannot be isolated at whole firm level; and
- there are important omitted variables in the data set available.
Our current conclusion here is that the relationship between R&D and firm performance is complex rather than non-existent. Certainly, the firms in the FTSE100 with higher R&D as a proportion of sales have been judged by the market to be more successful over the recent past than the index as a whole. Figure 13 illustrates this for a portfolio of the FTSE100 firms spending at least 4% of their sales on R&D3. The value of the portfolio has risen by 51% since 2001; the FTSE100 index rose by 27% over the same period.
Figure 13: Change in value of the FTSE100 R&D portfolio over time
- The value of the R&D portfolio has been constructed using the sum of share price of each share in the portfolio. The portfolio is made up of AstraZeneca, GlaxoSmithKline, Shire, BAE Systems, Sage, Rolls Royce, Johnson Matthey, Reuters, Smiths, Smith & Nephew and BT. Johnson Matthey is included on the basis of its sales net of the cost of precious metals. The equivalent portfolio in 2006 did not include BT. A similar portfolio drawn up in 2001 was: ARM, AstraZeneca, GlaxoSmithKline, Shire, Misys, BAE Systems, Sage, Spirent, Rolls Royce, Johnson Matthey, Reuters and Smiths.
