The Innovation Revolution is Dead; Long Live the Revolution

How can I possibly contend that the Innovation Revolution is dead? Because I have seen the bodies lying in the streets.

Andrewgenn 2 2 2 56dde49e9115c
iStock/andrewgenn

I have been doing this innovation stuff for a long time. I have watched it ebb and flow, die during every recession, and then pick back up again. I fear this time may be different.

A few years ago I wrote about how every economic policy pundit from the cloistered halls of Washington, D.C. all the way to — well, almost clear out to the edge of the Capital Beltway — predicted that America’s Innovation Revolution was going to drag this country out of the recession and send us soaring back to prosperity. Hallelujah! Praise the Lord!

We were going to innovate our way to renewed world dominance, show everyone our innovation chops. Any day now. Wait for it. Wait.

So what happened to the much vaunted Innovation Revolution? Where are we on the R&D front? One clear indicator of the collapse of the Innovation Revolution is the decrease in dollars being spent on R&D.

On a federal level we have cut back a bit, in fact, we have cut back a lot. The flow that once primed the pump of R&D, our government, turned off that tap. True, from a budget dollars perspective the U.S. remains the big spender, allocating far more R&D money than other country. There is a worrisome trend, however: the U.S. is not bankrolling the Innovation Revolution at the same pace as our competitors.

According to an article on Investopedia, “From a dollar perspective the U.S. remains the big spender, still dwarfing R&D spending elsewhere. It spent in the region of $450 billion in 2013. But as a percentage of total U.S. federal spending, R&D levels in 2014 were at their lowest since 1956. According to data from the Congressional Budget Office (CBO), funding for R&D in areas such as medicine, defense, energy and agriculture dropped 10% from 2009 to 2014, after adjusting for inflation. At the same time, between 2008 and 2012 China doubled its R&D spending.”

OK, so the federal pump-priming is drying up, soon to be sequestered to a dribble. But that is not the only source of R&D funding in the U.S. What about corporate spending on R&D, is that more flush? The inconvenient truth is that corporate R&D budgets have been flushed – down the toilet.

Well, how could that be true? In the Bloomberg article, “Look whose driving R&D now,” by Matthew Phillips and Peter Coy, the authors show that 2015 was a bumper year for R&D spending.

So how can I possibly contend that the Innovation Revolution is dead? Because I have seen the bodies lying in the streets. Take a look at who is spending R&D money. It is primarily information technology companies and the pharmaceutical companies. Yep, they are spending money alright – but their investment is in apps, software, and some infrastructure.

The innovative products that the info tech companies’ R&D teams envision and design, where are they coming from? Mostly from China and Southeast Asia. Big Pharma spending is seriously in decline, and if you search for innovation in pharmaceuticals you will have to look overseas for both the research and the development.

Of the largest Big Pharma companies, five are American and five are European, and at least one of the American firms has been kicked in the seat of the pants by stock analysts for its failure to spend enough on R&D. That is a strategically crucial, but perilously ignored piece of intelligence on the battlefield of the Innovation Revolution. A strange way to wage war, no?

Where is Industrial America?

So where is the rest of Industrial America in the midst of the Innovation Revolution? They are huddled deep in the trenches and bunkers, sitting on piles of cash like Smaug on his dragon’s piles of gold.

Economic analysts are predicting those companies will remain down in the bunkers for 2016.

The private sector is exacerbating that worrisome trend of diminished R&D with a strategy called “inorganic growth,” which means that many corporations have quit investing in their own R&D farms and are strolling through the orchard looking for low hanging fruit.

The Innovation Revolution scientists, engineers, and markets, those erstwhile leaders of the campaign to reclaim America’s preeminence, have become the lost battalion, cut loose and abandoned. Mergers and acquisition is all the rage now, especially in info tech, which really means apps and software.

American corporations have lost their confidence in internal or organic growth. They have lost faith that their own R&D staff can create disruptive products that will put them one-up on the competition.

Heck, they don’t even trust their staff to stay a step ahead of the geeky, freewheeling guys in the garage workshops who are inventing the next generation of things, making the innovative leap. And the corporations’ lack of faith is well-founded; they are getting exactly what they paid for, and they know it.

The collapse of the Innovation Revolution is partly the result of the recession. When it was necessary to pare back, to cut overhead, companies got rid of the highest paid (read: older) engineers and marketing people. Companies needed to hang onto their sustaining folk, but the veteran engineers and marketers were just too expensive to keep on the payroll during the downturn, so they were let go. They took with them their years of experience and their sound judgment – knowing what to do, and more importantly knowing what NOT to do.

R&D Has Been Pared to the Bone

Now, these same companies look at the fresh faced youngsters in their engineering and marketing operations and shudder at the thought of putting millions of R&D dollars into the hands of tyros with minimal experience, but lots of enthusiasm to try everything, and all at once.

Corporations’ R&D sections are also lagging because some of the smarter youngsters, frustrated by their employers’ lack of daring, have fled the coop to go out on their own. More of these brilliant young engineers and newly minted MBAs were never trapped in the coop in the first place. They found their niche by networking with friends, industry contacts, and social media contacts, backing their ideas with venture capital and crowdfunding. Why not? They are at that time of their lives when they can risk it all on a dream and a start-up plan.

Not all of them are successful, most fail, but the statistical law of large numbers assures a few big winners. If you have a large enough sample of innovators, some will create products of major value, certainly enough for the trolling companies to find some things that will fit their portfolios. Even if the IP is high-cost, CFOs still reason that it is still cheaper than trying to operate this type of venture R&D in-house. And given the experience level and motivation of their R&D staff, they may be right.

I am not saying that the current crop of corporate in-house engineers and marketers are at fault. They have been dumped into a messy situation, victims of the corporate oligarchy de jour. Clearly management, if they can be called that, in the short-sighted pursuit of quarterly dividends to investors who know little and care less about long-term business planning, have pared non-essential operations (including R&D) to the bone to keep profit figures high.

But the Innovation Revolution is not a 90-day battle, it is a long, drawn-out war. It will be interesting to see how corporations try to keep their numbers up when their products are old and discarded, and they have nothing new and exciting coming down the pipeline.

Maybe their hope is that the garage start up folk and universities will provide an endless supply of great new products. But eventually, inevitably, this bonfire of social media driven collegiality and university driven greed will sputter out.

All engineering and economic surges have a limited life span, and this one will find its own boom, spike, and bust cycle. After that, will there be a new era of corporate R&D operations? A rehiring of the old codgers, usually as consultants for twice the money they would have been paid in the first place, who can revive the Innovation Revolution? One can only hope.

So Corporate America, learn a lesson from an Oxford don. Smaug, with his hoarded piles of gold had a small chink in his armor, and it took only one well-placed arrow to down him and to send him to his doom. The chink in your armor is the abandonment of internal R&D, which will inevitably cause you to fall to your doom as well.

Mike Rainone is the founder and chief innovation officer of PCDworks, a full-service science and technology development firm that specializes in immersion innovation, a proprietary methodology developed by Rainone. He holds more than 20 patents, and has worked for leading international companies across a broad range of industries, including 3M, Baker Hughes, Halliburton, Kimberly Clark, LEGO, and PepsiCo. Contact him at mrain1@pcdworks.com and visit www.pcdworks.com.

More in Blogs