Just about every company will tell you that innovation is one of its highest priorities. How can you tell if the company truly means it, or if it's mostly wishful thinking or marketing hype? We can see if the company is putting its money where its mouth is by measuring how much it spends on innovation relative to other companies in its industry. But, this is much easier said than done. There is no consensus as to which budget line items to include in measuring innovation spending. So, as often happens, people will try to use a well defined, concrete line item as a proxy for estimating the measurement they are really after.
Research and development is often used as such a proxy for innovation. Many assume that since both R&D and innovation are supposed to translate into competitive advantage, looking at how much companies spend on R&D equates to how serious they are about innovation. But, as Michael Schrage, a Research Fellow in MIT’s Center for Digital Business wrote in an FT article in November of 2005:
“Any policymaker, chief executive or innovation champion who relies on R&D intensity and R&D budgets as a meaningful or usable metric to assess global competitiveness virtually guarantees shoddy analysis and distorted decisions. Few things reveal less about a company's ability to innovate cost-effectively than its R&D budget. Just ask General Motors. No company in the world has spent more on R&D over the past 25 years. Yet, somehow, GM's market share has declined.”
“The simple fact,” he later added, “is that R&D spending - whether in euros, dollars or as a percentage of sales - is an input, not a measure of efficiency, effectiveness or productivity. Ingenuity, invention and innovation are rarely functions of budgetary investment.”