Top 10 Biggest Spenders on Innovation
To keep at the forefront of innovation, science, health and tech industries lead the pack in R&D spending
By IBISWorld Industry Analyst Agata Kaczanowska
Though new technologies are used throughout the economy, they are first and foremost adapted in science-, health- and technology-related industries. These industries are generally highly competitive in terms of productquality and price and, therefore, depend on innovation. Most of these industries also have high market share concentration, merger and acquisition activity and employee wages.
Driven by new and quickly changing product technologies, many of these industries are highly competitive. Companies rely heavily on patents, trade secrets and confidentiality and licensing agreements to establish and protect proprietary technology and product innovations. For a company to develop new products it typically must sustain high levels of research and development (R&D), which results inever-increasing costs; companies spend up to 20.0% of revenue on R&D. This expenditure is essential in facilitating the development of technologically advanced products and helping maintain competitive advantages.
In many of these industries, a few companies dominate the industry because bigger companies are able to spread their R&D expenditure across a larger revenue base. Large companies also have greater marketing networks and budgets for their products than smaller firms, so they pursue smaller companies for acquisitions. On the flip side, a company with a highly attractive patent portfolio but weak cash flow can become a highly sought-after acquisition target. Consequently, many of these industries also have an above-average rate of mergers and acquisitions.
Skilled specialists are needed to perform R&D, which pushes up wages in many of these industries. In fact, the Scientific Research and Development industry, for example, spends 48.8% of revenue on labor. For larger companies, effective itinerary and task management, employment of part-time workers and maximum use of technology and labor-saving machinery can lead to more efficient management of labor costs.
Biotechnology – 22.0% (R&D Share of Revenue)
Biotechnology companies depend on R&D because many have no products on the market and exist only to research and develop new technologies. Growing commercial pressures and rising R&D costs have prompted them to seek financial support from large pharmaceutical corporations through licensing and collaborative R&D deals. Progressive enhancements in integration have subsequently led to traditional pharmaceutical companies becoming increasingly dependent on the technology platforms and approaches adopted by biotech companies. The Biotechnology industry is expected to spend $20.3 billion on R&D in 2011.
Semiconductor and Circuit Manufacturing – 20.0%
Technology-leaders in this industry spend significant sums developing new chip designs and production methods to keep up with the breakneck pace of industry growth over the past 30 years. Many of the technologies that are currently in the R&D phase will not likely hit the market for at least five years. Despite the expected lag, IBISWorld expects Semiconductor & Circuit Manufacturers to spend nearly $11.9 billion on R&D in 2011.
Brand Name Pharmaceutical Manufacturing – 19.5%
In recent years, some firms have merged with larger more successful firms to stay afloat and others are consolidating R&D efforts. The companies that develop blockbuster drugs prosper. Additionally, pharmaceutical companies are narrowing the focus of R&D units through a strategic concentration on key chronic illnesses. Though discovering and developing new drugs is often a time-consuming, risky and costly process, firms that succeed can earn sizable profit, at least until generic versions of the drugs (i.e. me-too patented drugs) enter the market. Leading drug firms face pressure to develop new and innovative drugs to lay a solid foundation for future growth because drug patents have a finite life. In 2011, the Brand Name Pharmaceutical Manufacturing industry is anticipated to spend $32.2 billion on R&D.
Vitamin and Supplement Manufacturing – 16.3%
The relatively low number of new vitamin and supplement manufacturers in the past five years, combined with increasing consumer spending on wellness items, has resulted in steady industry investment in new products. This investment has resulted in sustained R&D costs for most companies; for newer entrants looking to expand their product portfolio, costs have been higher. In 2011, the Vitamin & Supplement Manufacturing industry is expected to spend $4.5 billion on R&D.
Alarm, Horn and Traffic Control Equipment Manufacturing – 15.0%
New smaller, more energy-efficient and smarter equipment has been developed in the areas of alarm systems, smoke detectors and intercom systems. New and enhanced sensor technologies have improved the utility of intruder- and fire-detection alarms (and reduced false alarms) and traffic-control equipment. Advances in communication, computation and sensor technologies make it possible to develop “intelligent transportation” that can detect objects in their proximity, and communicate with one another and the traffic-control infrastructure. In 2011 this industry is expected to spend $545.5 million on R&D.
Software Publishing – 12.0%
The costs of development, marketing and technical support for new software generally run high (though, costs for subsequent versions are often much less). In particular, product innovation plays a key role in the success of video game publishers, which is a subindustry of the Software Publishing industry. Innovative features are one of the most important differentiating factors between competing games. This value basis is expected to prompt publishers to invest 22.0% of 2011 revenue in R&D and patent acquisition. Software publishers are expected to spend $18.8 billion on R&D in 2011.
Search Engines – 12.0%
This industry has an extremely fast pace of technological change, and so constant R&D is an essential part of remaining competitive. Proactive R&D spending can strengthen companies’ large profit margins in the medium term in a variety of ways. For example, more effective spam filtering algorithms have reduced waste of computing and bandwidth resources for Google’s Gmail service. Similar gains can be achieved through improved detection of malicious websites in search results, improved relevancy algorithms or new computing paradigms. The Search Engines industry is expected to spend $2.9 billion on R&D in 2011.
Medical Device Manufacturing – 12.0%
Product development is the most important source of growth within the Medical Device Manufacturing industry. And so the consolidation that has characterized the industry is anticipated to give many smaller manufacturers access to substantial R&D budgets, driving innovation. In December 2010, for example, GE acquired Clarient for $580 million. Clarient is in the molecular diagnostics segment and has grown revenue 68.0% per year on average since 2005. GE far outspends its peers in research and development, and so the deal will increase GE’s presence in cancer diagnostics while effectively boosting company sales. The Medical Device Manufacturing industry as a whole is expected to spend $7.2 billion on R&D in 2011.
Computer and Printer Leasing – 12.0%
The Computer and Printer Leasing industry has experienced a marked change in clients’ product and service demands, with a move toward digital color equipment and solutions through multifunction devices. In response, companies like Xerox have concentrated on R&D to develop innovative products at various price points to meet changes in demand. Focus has increasingly become more resource oriented in the area of information management rather than solely on technology. The company is aiming to tailor individual solutions in an integrated manner across the entire organization. Overall, the Computer and Printer Leasing industry is expected to spend $730.1 million on R&D in 2011.
Glasses and Contact Lens Manufacturing – 12.0%
Players within this industry must sustain high levels of R&D to ensure that their product lines are strong, and they do this through in-house R&D efforts, by licensing products from smaller companies or through mergers and acquisitions. As the technological stakes have increased, smaller firms have found it difficult to compete against firms with larger R&D budgets. As a result, smaller firms have either exited the industry or been acquired by larger firms that sought access to their intellectual property. While competition continues and enterprise numbers fall through year-end, the industry is expected to spend $716.9 million on R&D in 2011.
To download full research reports for the industries mentioned in this article, click the links below.
Biotechnology , Semiconductor and Circuit Manufacturing , Brand Name Pharmaceutical Manufacturing, Vitamin and Supplement Manufacturing, Alarm, Horn and Traffic Control Equipment Manufacturing, Software Publishing, Search Engines, Medical Devide Manufacturing, Computer and Printer Leasing, Glasses and Contact Lens Manufacturing