R&D Spending Holds Steady in Slump

Wall St Journal ^ | 4/6/2009 | JUSTIN SCHECK and PAUL GLADER

[SonOfDarkSkies]

Major U.S. companies are cutting jobs and wages. But many are still spending on innovation.

Wary of emerging from the recession with obsolete products, big U.S. companies spent nearly as much on research and development in the dismal last quarter of 2008 as they did a year earlier, even as their revenue fell 7.7%, according to a Wall Street Journal analysis. The sampling looked at 28 of the largest U.S. R&D spenders, excluding deeply troubled auto makers and the drug industry, where R&D spending is dictated by government requirements.

Big R&D spenders say they've learned from past downturns that they must invest through tough times if they hope to compete when the economy improves. Many innovative products, from the iPod to fuel-efficient aircraft engines, were hatched during downturns. If past patterns hold, today's spending may plant the seeds of innovations that triumph in the recovery.

"Companies by and large realize that large reductions in R&D are suicidal," says Jim Andrew, a senior partner at the Boston Consulting Group. "It is the last shoe to drop."

Overall spending by the 28 companies nudged down 0.7% in the quarter. Among those keeping up R&D funding is Microsoft Corp., which spent 21% more in the fourth quarter over the year-earlier period, while revenue was virtually flat. Intel Corp., which posted a 90% drop in fourth-quarter net income, plans to spend $5.4 billion on R&D this year, down slightly from last year, plus $7 billion in the next two years to modernize its plants. 3M Co., maker of Scotch tape, Post-it notes and other products, has laid off 4,700 workers in the past 15 months and will cut capital expenditure 30% this year, but it expects R&D spending to stay flat or increase slightly.