Review of "How Innovation Really Works: Using the Trillion-Dollar R & D Fix to Drive Growth," by Anne Marie Knott

Review of

How Innovation Really Works: Using the Trillion-Dollar R & D Fix to Drive Growth, by Anne Marie Knott ISBN 9781259860935

Five out of five stars

 The theme of this book is impossible to argue with, no one disputes that research & development (R & D) spending is a main driver of economic growth. While it has always been important the increased velocity of change in the past century in general and the last decade in particular has made innovation and improvement even more essential and often critical to survival.

 I knew that I was going to be impressed with this book very early, when the subject was the performance of Jack Welch at GE. In many circles, Welch is put forward as an icon of corporate leadership, considered a sage. Yet, the reality is quite different. Before Welch, GE invested 40 to 50 percent of profits in R & D each year. When Welch introduced the market power strategy of investing to grab market share, the percentage of profits that invested in R & D dropped to below 15 percent.

 There was an immediate and steady rise in the share price when the market power strategy was introduced, peaking at $58 a share before starting a slow and steady decline to around $10 a share. GE had essentially burned through the capital that had made it the industrial power that was created by Thomas Edison. That fact is largely ignored when Welch is discussed. Another example of a failure to appreciate the value of R & D investment is HP in the nineties and early twenty-first century.

 Knott uses a computation known as the Research Quotient (RQ) as a metric to measure the return on R & D spending. It is a fascinating and revealing norm in that some of the conclusions are against the grain of conventional wisdom. For example, there is the belief that it is small companies that fire the R & D engine, a notion that is challenged by Knott. While there are valid reasons to question some of the aspects of RQ, it does help explain why productivity and economic growth are generally stagnant. For that reason, people in all positions need to read the book. The technical people working in R & D will find their position validated and hopefully the executives that allocated the internal capital will develop the courage to spend some money in driving a successful future.

 A secondary point in the book is that companies where institutional investors have a major ownership tend to invest more in R & D than those faced with the potential of an attack by people somewhat euphemistically called “activist investors.” Readers concerned about the economic future will be somewhat relieved to learn that there are islands where companies are making decisions using a focus that extends beyond the next quarterly earnings announcement.