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Booz Allen Hamilton’s annual study of the world’s 1,000 largest corporate R&D budgets uncovers a small group of high-leverage innovators who outperform their industries.

Specific findings include:

• Deep pockets can be dry wells. Analysis of the 2005 Global Innovation 1000 confirms the major finding from our initial study last year: Money simply cannot buy effective innovation. There are no significant statistical relationships between R&D spending and the primary measures of financial or corporate success: sales and earnings growth, gross and operating profitability, market capitalization growth, and total shareholder returns. Gross profits as a percentage of sales is the single performance variable with a statistical relationship to R&D spending.
• Less than 10 percent of companies are high-leverage innovators. Compared with others in their industries, only 94 of the companies in the Global Innovation 1000 produced significantly better performance per R&D dollar over a sustained period.
• Companies are getting better at squeezing benefits from R&D spending. R&D spending by the Global Innovation 1000 rose last year by more than $20 billion, but revenues rose more.
• Bigger can be better, even if it doesn’t boost breakthroughs. Scale provides advantages to R&D spenders. For the largest 500 companies, ranked by revenue and indexed by industry, median R&D spending was only 3.5 percent of sales in 2005, compared with 7.6 percent for the 500 smallest firms.
• Patents generally don’t drive profits. Boosting R&D spending can increase the number of patents that a company controls, but there is no statistical relationship between the number or even the quality of patents and overall financial performance.
• Masters of the innovation value chain have an edge. The high-leverage innovators and the companies with best overall performance distinguish themselves not by the money they spend, but by the capabilities they demonstrate in ideation, project selection, development, or commercialization.

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