Industrial Research Institute's R&D trends forecast for 2003: as they retarget the purpose and...

The R&D trends forecast for 2003 indicates that companies are retargeting the purpose and strategy of their R&D spending. The five main indicators (with survey question numbers) of that retargeting are:

* More alliances and joint ventures (9e).

* More spin-offs based

* More contracts with federal labs (9d).

* More grants and contracts for university R&D (9b).

* Lower intensity of R&D spending (9a).

Taken together, these changes indicate that companies are now pursuing ways to leverage the value of their R&D spending. "Leverage" in this case means to spend a bit less (as a percentage of sales) and to affiliate with others who have similar research goals.

Companies are also trimming human resources in R&D: many are significantly reducing the number of personnel (Q4) and hiring fewer new graduates (Q5). Again, the "big picture" of this year's anticipated changes in R&D trends is the emphasis on value and efficiency in R&D spending. Whether this translates to "effectiveness," however, remains to be seen.

The rest of this article describes highlights and implications of these findings. The first part concerns R&D conduct and the other, R&D spending. For continuity with last year's report (RTM, Jan.-Feb. 2002, pp. 16-20), we continue using the "Sea-Change Index" (Table 1). For each question, such as "Total company expenditures on R&D," the index is calculated by subtracting the percentage of respondents predicting any decrease from the percentage predicting an increase of 5 percent or more. This rough but effective assessment shows us whether companies, in the aggregate, are increasing or decreasing the factor measured by each question.

Data for this 19th annual R&D forecast were collected from questionnaires returned by official representatives of the 201 IRI member companies based in the United States. Ninety-five respondents completed the trends forecast questionnaire during August and early September, 2002, yielding a 47-percent response rate. (Response rate was 34 percent last year, 48 percent in the prior year and 38 percent in 1999.) Respondents estimated the relative change, from 2002 to 2003, in four categories: Expenditures, Effort Allocation, Personnel, and Other Trends. Note that survey responses indicate member company intentions. The data are helpful but imprecise because the balance of respondents across industries changes somewhat from year to year.

Table 1 shows the results for the surveys conducted from 1999 through 2002, labeled "2000" through "2003" respectively. Figure 1 shows a graphical summary of the results, which are tabulated in Table 2 and compared with prior years on page 20.

[FIGURE 1 OMITTED]

Changes in the Nature of R&D

Compared to last year, companies report that they intend to increase R&D joint venturing and involvement with government labs. Companies also report that R&D outsourcing to other companies is decreasing, which makes sense given the strategic nature of industrial research. By decreasing outsourcing, companies will likely get better control over their competitive strategy and intellectual property because they will be disclosing somewhat less information to third parties. At first blush, this may seem inconsistent with survey responses indicating an increase in joint ventures and government lab contracts. However, the responses are probably not inconsistent if interpreted on the whole to mean that companies are going to put more emphasis on working with others (again, "leverage") and less emphasis on outsourcing in which others do the research in entirety. Decreasing the outsourcing of R&D will likely also reduce the control and quality problems that can arise in an outsourcing relationship.

Last year, companies reported a continued need for new models of interaction with federal labs and universities. The increase in activity with alliances (9e), federal labs (9d), and universities (9b) is evidence of implementation of some of those new models.

Last year's report stated that the trend to license technology from others was flat. This year, it is apparent that, on balance, companies will scale back their licensing. Moreover, fewer companies plan to increase their licensing of technology to others. Thus, although more companies are using capabilities outside of their own organizations to create new technology-based options, the way those options are created has changed. Apparently the economic downturn has motivated a "flight to value."

R&D Expenditure Forecasts

Another big shift in the nature of R&D is that, on balance, we see more companies with declining spending on existing business and directed basic research (Q3) although they still report that they are shifting R&D to New Business projects. On balance, slightly more respondents than last year intend to reduce the intensity (R&D as percent of sales) of their spending. In addition, there is a dramatic increase in the proportion of R&D effort dedicated to outside-customer technical service. Again, this looks like another change intended to extract more short-term value from R&D, and perhaps even to contribute more directly to corporate revenue.

Table 1.--"Sea Change Index"

                                             2000   2001   2002   2003

1. Total company expenditures on R&D            0      5     -4    -15
2. Capital spending for R&D operations          4      3    -17    -18
3. Relative distribution of R&D costs:
   a) Support of existing business            -20    -10     -6    -24
   b) Directed basic research                  -9    -21    -11    -21
   c) New-business projects                    34     44     30      7
4. R&D professional personnel level            -3     -2     -4    -22
5. Hiring new graduates                        -5      2    -16    -14
6. Outsourcing R&D to other companies          11     11     -6     -8
7. Licensing technology from others
   ($ volume)                                  10      4     -0     -2
8. Licensing technology to others
   ($ volume)                                  20     10     17      8
9. How will 2003 compare to 2002?
   9a. Targeted R&D/sales ratio               N/A     -1     -5     -8
   9b. Grants, contracts, etc. for
       university R&D                           8      3     -1     12
   9c. Participation in consortia for
       precompetitive university research     -14    -12    -19      0
   9d. Contracts with federal laboratories     -9    -13     -8     28
   9e. Participation in alliances and
       joint R&D ventures                      40     40     33     49
   9f. Acquisition of technology
       capabilities through M&A               N/A     33     35     18
   9g. New spin-offs based on developed
       technology                             N/A     19     19     20
   9h. Outside-customer tech-service
       efforts relative to total R&D
       (time or $)                            -19     -6     -3     18

Table 2.--Results of 2003 R&D Trends Forecast

                                                    Relative Change
                                                    (% of Respondents
                                                    Reporting)

Expected Changes in 2003 compared                   -5% or
with 2002 Experience                                 less    <-5% to 0

 1. Total company expenditures on R&D                 10        16
 2. Capital spending for R&D operations               12        12
 3. Relative distribution of R&D costs:
    a) Support of existing business                   11        16
    b) Directed basic research                        10        16
    c) New-business projects                           4        10
 4. R&D professional personnel level                   9        17
 5. Hiring new graduates                               6        11
 6. Outsourcing R&D to other companies                 2        13
 7. Licensing technology from others ($ volume)        2        10
 8. Licensing technology to others ($ volume)          2         5
 9. How will 2003 compare with 2002 for the
    following:
    a. Your targeted R&D/Sales Ratio                Decrease 28%
    b. Grants, contracts, etc. for university R&D   Decrease 16%
    c. Participation in consortia for
       pre-competitive university research          Decrease 14%
    d. Contracts with federal laboratories          Decrease 6%
    e. Participation in alliances and joint R&D
       ventures                                     Decrease 1%
    f. Acquisition of technological capabilities
       through M/A                                  Decrease 14%
    g. Your new spin-offs based on developed
       technology                                   Decrease 5%
    h. Outside-customer tech-service efforts
       relative to total R&D (time or $)            Decrease 8%
10. Do you have a growth center?                    Under
                                                    consideration 5%
11. Have you used E-business as a value-creation    Under
    channel for new technology?                     consideration 17%

                                                    Relative Change
                                                    (% of Respondents
                                                    Reporting)

Expected Changes in 2003 compared                   >0 to     2.5% to
with 2002 Experience                                 2.5%       5%

 1. Total company expenditures on R&D                 33        30
 2. Capital spending for R&D operations               52        18
 3. Relative distribution of R&D costs:
    a) Support of existing business                   47        23
    b) Directed basic research                        56        13
    c) New-business projects                          34        31
 4. R&D professional personnel level                  42        28
 5. Hiring new graduates                              56        24
 6. Outsourcing R&D to other companies                60        18
 7. Licensing technology from others ($ volume)       58        20
 8. Licensing technology to others ($ volume)         53        25
 9. How will 2003 compare with 2002 for the
    following:
    a. Your targeted R&D/Sales Ratio                Remain-same 52%
    b. Grants, contracts, etc. for university R&D   Remain-same 56%
    c. Participation in consortia for
       pre-competitive university research          Remain-same 72%
    d. Contracts with federal laboratories          Remain-same 60%
    e. Participation in alliances and joint R&D
       ventures                                     Remain-same 49%
    f. Acquisition of technological capabilities
       through M/A                                  Remain-same 54%
    g. Your new spin-offs based on developed
       technology                                   Remain-same 70%
    h. Outside-customer tech-service efforts
       relative to total R&D (time or $)            Remain-same 66%
10. Do you have a growth center?                    Yes 39%
11. Have you used E-business as a value-creation
    channel for new technology?                     Yes 29%

                                                    Relative Change
                                                    (% of Respondents
                                                    Reporting)

Expected Changes in 2003 compared                    5 to    More than
with 2002 Experience                                 10%        10%

 1. Total company expenditures on R&D                  9         2
 2. Capital spending for R&D operations                4         2
 3. Relative distribution of R&D costs:
    a) Support of existing business                    3         0
    b) Directed basic research                         4         1
    c) New-business projects                          14         7
 4. R&D professional personnel level                   4         0
 5. Hiring new graduates                               2         1
 6. Outsourcing R&D to other companies                 6         1
 7. Licensing technology from others ($ volume)        6         4
 8. Licensing technology to others ($ volume)         11         4
 9. How will 2003 compare with 2002 for the
    following:
    a. Your targeted R&D/Sales Ratio                Increase 20%
    b. Grants, contracts, etc. for university R&D   Increase 28%
    c. Participation in consortia for
       pre-competitive university research          Increase 14%
    d. Contracts with federal laboratories          Increase 34%
    e. Participation in alliances and joint R&D
       ventures                                     Increase 50%
    f. Acquisition of technological capabilities
       through M/A                                  Increase 32%
    g. Your new spin-offs based on developed
       technology                                   Increase 25%
    h. Outside-customer tech-service efforts
       relative to total R&D (time or $)            Increase 26%
10. Do you have a growth center?                    No 56%
11. Have you used E-business as a value-creation
    channel for new technology?                     No 54%

In previous years, a scale of 1 to 5 was used, with 1 representing
"significantly less" (-5 percent or less), 2 "slightly less"
(0 down to -5 percent), 3 "approximately the same" (greater than
0 up to 5 percent), 4 "somewhat more" (5 to 10 percent), and 5
"significantly more" (more than 10 percent). This year, a scale of
1 to 6 was used, and last year's category 3 was divided into two
separate categories; category 3 "approximately the same" (>0 to
2.5%) and category 4 "slightly more" (>2.5 to <5%). This change
does not materially affect the Sea-Change Index (Table 1).

This report was written by Albert L. Johnson, senior analyst for science and technology at Corning, Inc., and chair of the IRI's Research-on-Research Committee. It is based on the forecast conducted annually by the RoR committee, with the assistance of Madora Bianco and Margaret Grucza of the IRI staff, Kent Crawford, past-RoR committee chair, and Roger L. Whiteley, consultant. johnsonAL@corning.com