Industrial Research Institute's R&D Trends Forecast For 2007

The marketplace is providing plenty of mixed signals to business--rapidly changing energy prices, a slowing housing market, and uncertainty in consumer confidence. Nevertheless, these signals are not deterring the participants in IRI's annual trends survey from forecasting a significantly higher level of R&D spending and a continuation of growth in "open innovation. " "Total company R&D expenditures" (Q1) is forecast to have the largest growth that we have seen this decade. It appears that this level of growth is merely keeping pace with growing sales, as the same number of companies are forecasting a decrease in R&D intensity ("Your targeted R&D/sales ratio," Q9a) as are forecasting an increase. Yet most of the R&D expenditure increase appears to be planned to develop "new-business projects" (Q3c) with declines forecast in "support of existing business" (Q3a) and "directed basic research" (Q3b). The trend seen last year of an increase in "hiring new graduates" (Q5) is forecast to continue at a modest level. IRI member companies report no planned increase in the R&D professional personnel level (Q4). It appears that this hiring is aimed at replacing retiring workers rather than generating a higher level of internal research activities. There are significant increases in open innovation as shown in the forecasts for use of outside resources. Companies are planning to make increasing use of "outsourcing R&D to other companies" (Q6) and "licensing technology from others" (Q7). They are also planning more work at universities and federal labs, as shown by "Grants, contracts, etc. for university R&D" (Q9b), "Participation in consortia for pre-competitive university research" (Q9c), and "Contracts with Federal Laboratories (Q9d). Trends Analysis--Looking to 2007 This is the 23rd IRI Trends Forecast. It is based on surveys from 99 of the nearly 200 IRI member companies that conduct R&D in the United States. The number of surveys from members with R&D outside of the U.S. was insufficient for analysis. The survey responses were collected in July and August of 2006. Because this is a voluntary survey and the IRI membership changes due to business events such as mergers, it is inevitable that the mix of companies changes from year to year. Nevertheless, it is believed that the responses from over 50 percent of the IRI membership are a sufficient number from the R&D community for the data to be meaningful. One useful way to examine trends over the years from 2000 forward is the Sea Change Index, in Table 1. Table 2 shows the results of the 2007 survey and it can be seen that there are six possible responses for Questions 1 through 8. The first two categories are deemed in the Sea Change Index as negative because they include no growth or a decrease. The last two categories are deemed positive because they anticipate a growth of more than 5 percent. The Sea Change Index is calculated by taking the difference in the sum of the last two (more than 5 percent growth) and the sum of the first two (zero or negative growth). It is likely that this index understates the absolute value of change but it is believed to be a good indicator of the direction of change. Figure 1 graphically depicts the Sea Change Index for R&D spending since 2000. The trend that began in 2005 of growth in Total Company R&D expenditures is forecast to accelerate sharply. Because the Sea Change Index for R&D/Sales Ratio is forecast to be neutral, it appears that significant sales growth is anticipated. With the Capital Spending Sea Change Index slightly negative, it appears that these additional sales will not require an increase in capital spending from the 2006 level. [FIGURE 1 OMITTED] We can speculate that the potential sales growth discussed in the analysis of Figure 1 comes largely from new projects. The Sea Change Index for Categories of R&D Spending (Figure 2) shows that a second consecutive year of strong new business R&D is forecast (Sea Change Index for New Business Projects greater than 30 percent). …