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.
