R&D and sales
In contrast, for the largest US investors in R&D, the average ratio of R&D to sales stood at 4.4%, slightly below last year’s figure of 4.6%. As discussed the reason for the US firms having a higher average ratio of R&D to sales is due to the different sector mix of UK and US firms.
Overall, sales grew faster amongst the UK850 than R&D investment over the last 12 months. This contrasts with the previous year where investment in R&D grew faster than sales. The overall picture, however, masks significant differences between sectors:
- R&D grew faster than sales in pharmaceuticals and biotechnology – the biggest investor in R&D in the UK – as well as the banking sector, fixed line communications, mobile telecommunications and oil and gas production; and
- sales grew faster than investment in R&D in aerospace and defence, automobiles and parts, technology hardware and equipment and food producers.
This pattern is reflected in Figure 8 which shows investment in R&D as a proportion of sales over the last five years.
Figure 8: R&D expenditure as a proportion of sales by sector in the UK850 (2003-2007)
R&D and profits
Figure 9 shows firms’ investment in R&D as a proportion of their operating profits in 2007 by sector for both the UK850 and G1400. For two of the UK’s main R&D sectors, notably automobiles and parts and technology hardware and equipment, the value of their investment in R&D was substantially more than their operating profits. The technology hardware and equipment sector, for example, invested the equivalent of 232% of its profits in R&D and the automobiles and parts sector invested 200% of its profits. This reflects the fact that in both sectors research and innovation is a crucial value-adding activity and, for companies to survive longer term, they need to sustain their level of investment. In contrast, for firms in the banking and oil and gas producing sectors, the ratio of the level of investment in R&D to their operating profits was low (3.5% and 2% respectively).
Of the 15 sectors making the biggest investments in R&D - aerospace and defence, automobiles and parts, pharmaceuticals and biotechnology, software & computer services, technology hardware and electronic and electrical equipment - the value of their investment in R&D was substantially more than their operating profits.
The performance of the UK850 firms contrasts with that of firms globally in the G1400. Figure 9 shows investment in R&D as a proportion of profits for firms in the G1400. Of the 15 sectors making the biggest global investments in R&D, only the leisure goods sector invested an amount equivalent to its operating profit in R&D. Again, this may reflect the differences in composition of the two lists.
Figure 9: R&D expenditure as a proportion of operating profits across UK850 and G1400 (2007)
The pharmaceuticals & biotechnology, automobiles & parts and software & computer services sectors in the UK850 have improved their profit margins significantly over the last four years (see Figure 10). The automobiles & parts sector was loss-making in 2003, but increased its operating profit as a proportion of its sales to 1.8% in 2007 (from -5.9%). It reduced its investment in R&D as a proportion of sales, however, over the same period to 3.8% in 2007.
Although investment in R&D declined slightly as a proportion of sales in the pharmaceuticals & biotechnology sector, the sector remained one of the most profitable sectors. In contrast, the companies in the fixed line communications sector increased their investment in R&D as a proportion of sales. On average, levels of investment in R&D and profitability as a proportion of sales were little change for companies in the aerospace & defence sector.
Figure 10: R&D as a proportion of sales and operating profit for UK850 (2003 and 2007)
