Are Companies doing enough to Innovate?

We are living in the age of ‘superstar companies’. The top players in their respective industries are prospering, yet economic growth remains sluggish in many parts of the world.

The reason for this paradox is that, the productivity gap between firms at the global frontier and those lagging behind has widened. Frontier firms are able to employ the most advanced technologies, which in turn allows them to win market share at the expense of their lesser productive competitors. Further, the globalized markets in which frontier companies operate, in disproportionately reward their knowledge advantage setting them even further apart from the rest.

In a recent Harvard Business Review article, Nicholas Bloom from Stanford University argued that this type of “winner takes all” competition is the driver of rising income inequality.

Several explanations have been proposed for the emergence of this “winner takes all” competition: a drop in search & transaction cost because of Internet; network effect; ability to scale up quickly using IT, and automation.

Paul Hünermund’s analysis suggests another important driver: Research & Development (R&D) investment is increasingly concentrated in few top firms. Some companies are investing heavily in R&D to expand their technological capabilities, while others not making that investment fall further behind.

In Germany: Between 2003 and 2015, R&D expenditure in the business sector increased by 59%, reaching a record high of 157.4 billion euro. Over the same period, however, the share of companies in the economy investing in R&D fell from 47% to 35%. U.S. data shows something similar: overall business R&D increased by 67% between 2003 and 2014; while the increase was largest for select few companies. In 2014, top hundred U.S. companies with the largest R&D budgets invested 92% more in innovation than in 2003.

The team at Actuate Business Consulting, a knowledge based management consulting firm in India, agrees that it is idealistic to expect every company to invest in R&D, although a  higher concentration of innovation efforts can be a major source of productivity differences between companies. Competition at the global research frontier is getting ever more fierce and at the same time, many companies seem to be unable to keep up with the pace at which these developments are unfolding. Companies that continue to innovate through R&D become superstar companies, while the rest get left behind.