Chart of the Week: America – a skilled corporate innovator

The US leads the world in corporate innovation. This is due partly to the sheer volume of its spending on R&D (the main input of innovation), but primarily to its unrivalled ability to convert R&D to sales. No investor has a bottomless pocket – whether an ‘angel’ or a common or garden investor, everyone expects a return on their money. Looking at US corporates, there is a clear positive correlation between past R&D intensity (measured as R&D spending over sales) and five-year-ahead growth in sales. The same cannot be said of any of the other major R&D hubs. Investors in UK and Chinese companies cannot guarantee that the company in which they place their money will generate any increased sales from it in the future – this is shown by the flat fitted lines in the UK and Chinese panes of the chart below. There is a slightly positive correlation between past R&D intensity and future sales in Japan, but that is by no means statistically significant. US companies have the know-how, the resources, the support mechanism (for example, through R&D-enhancing CapEx) and the framework to leverage their R&D investments and bring their new products into the global marketplace, promoting them and at the end of the road reaping the benefits. For Japan, the UK or indeed China to challenge the US’s dominance in innovation, they should focus their efforts on making the returns on private corporate R&D more attractive.

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The views expressed in this article are the views of the author, not necessarily those of Refinitiv Lipper or LSEG.

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