News Analysis August 9, 2010, 8:45PM EST

Tough Times Spur Shifts in Corporate R&D Spending

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Working Together on Crops

Monsanto (MON) has been creating a new opportunity in the area of genetically modified crops with the help of an R&D collaboration with the German chemical giant BASF. On July 7, the two companies announced they would broaden the partnership to include wheat as a fifth focus crop, joining corn, soybeans, cotton, and canola. They also said they would boost their joint investment by $1 billion, to $2.5 billion. Monsanto and BASF are aiming to commercialize a biotech wheat seed starting in 2020. The blending of crop genetics with crop protection chemistry is creating new variations of crops able to withstand the effects of Monsanto's weed killers. "The strategy here is to create a totally new market," says Brown at StrategyMark. (Monsanto's total R&D spending reached $1.1 billion in 2009, up 14.2 percent from 2007, vs. a 40 percent increase in revenue over the same period.)

Intuitive Surgical (ISRG), which develops robots that replicate a surgeon's hand movements and help hospitals avoid more invasive surgeries for heart, lung, and urology patients, licenses intellectual property from other companies to supplement its internal innovation, says Chief Financial Officer Marshall Mohr. Intuitive's R&D budget has nearly doubled since 2007, to $95.1 million, or 9 percent of 2009 sales, with sales up 75 percent over that period. While Mohr says the company isn't blind to economic conditions, it did continue to raise R&D spending through the recent recession. "We believed there were additional opportunities for us that we needed to invest in … technologies that will allow us to enter new markets and expand in the markets we're already in," he says.

Other companies are sticking with the traditional proprietary approach to R&D spending.

For A Quicker Recovery

Danaher Corp. (DNR) views an economic downturn as a chance to gain market share by maintaining its commitment to R&D investment even as competitors may be cutting theirs. To avoid sacrificing margins, however, the company, which makes analytical testing devices for a range of uses, from water quality to blood samples, requires its businesses to "aggressively manage" general and administrative, as well as manufacturing, costs in order to finance R&D, senior management says.

Last year, at the bottom of the recession, even if a business's revenue was down as much as 15 percent, Danaher made sure that managers were taking steps to stay ahead of competitors. As a result, some of its businesses that lost revenue were down less than the competition, which the company largely attributes to sustained R&D spending. In spite of the economy, Danaher introduced a large number of key new products in 2009 and has recovered more quickly than it would have otherwise.

Danaher's R&D budget rose 5.2 percent from 2007, to $632.65 million in 2009. Danaher has doubled its R&D spending as a percentage of sales over the past 10 years, to about 6 percent in 2010, even as its total revenue has tripled over that same period. That's partly due to acquisitions that have made its portfolio more technology-centric, but it's also a conscious effort to use R&D to drive market share. After its acquisition in 2004 of Radiometer, a Danish manufacturer of instruments that hospitals use to do critical-care tests on kidney and lung functions, Danaher hiked Radiometer's R&D budget from about 8 percent to more than 10 percent of sales, which helped the unit develop more innovative products faster, doubling its revenue growth to more than 6 percent in 2009.

The need for new technologies that can withstand increasingly "hostile environments," such as shale gas reservoirs with much higher pressures and temperatures, is driving Baker Hughes International's (BHI) commitment to R&D investment, regardless of economic conditions, says company spokeman Gary Flaharty. The oilfield service company's R&D budget climbed 6.7% from 2007, to $397 million in 2009, despite a 7.3 percent drop in revenue over the same period.

"You're competing with other industries for PhD chemists, petroleum engineers, [and other R&D specialists], so you can't simply ramp up or ramp down because of the vagaries of the economy," Flaharty says.

Bogoslaw is a reporter for Bloomberg Businessweek's Finance channel.