Boston,  MA, 10 August 2020–  FCLTGlobal, a non-profit organization that develops research and tools that encourage long-term business and investing, today published a new report highlighting potential changes in the way companies and investors approach corporate R&D spending. Funding the Future: Investing in Long-horizon Innovation suggests, based on market data from 2009-2018, that a downturn in R&D returns is a result of a shorter-term focus with regard to innovative projects undertaken by public companies. 

Worldwide spending on R&D has slowly increased over the past decade. Between 2009-2018, total global R&D spending grew from $374 billion to $778 billion.  But  the productivity of that additional investment has been declining – an examination of the pharmaceutical industry in particular finds that the costs to bring an asset to market had increased to $2.2 billion in 2018 while returns on R&D investment had fallen to 1.9 percent.

Funding the Future’s interviews with industry experts reveal that R&D spending faces a unique set of short-term pressures relative to other types of long-term investment. In the face of such pressure, corporate management teams tend to cut long-horizon projects first. This tendency leaves companies and investors with unbalanced innovation portfolios, favoring short-term projects that offer more returns that are lower but more reliable.  

“Overweighting of short-term projects sacrifices significant return potential – finding new ways to manage R&D investments could rebalance portfolios and deliver better returns for companies, their investors and society,” said Sarah Keohane Williamson, CEO of FCLTGlobal. “The research shows how companies can support long-horizon innovation– likewise, investors can better value the upside of  companies’ long-horizon R&D investments. Both are essential.” 

Prior research from FCLTGlobal suggests companies that reinvest a greater portion of their earnings internally, including into R&D projects, outperform their peers by 9 percent per year on average. The report proposes alternative ways to structure, value, and manage long-horizon R&D in a way that both companies and their shareholders can optimize their portfolios, including: 

• Allowing members of the R&D team to work on multiple projects simultaneously to encourage a more objective, portfolio-oriented perspective 
• Using performance metrics for short-, medium-, and long-horizon projects that acknowledge and account for the differences in project profile 

• Sharing with investors the breakdown of R&D budget by expected time to market 
• Allowing for “fast failure” to alleviate behavioral biases 

Alongside these recommendations, FCLTGlobal has designed an interactive R&D Scenario Engine that allows corporate boards, executives, and risk committees to determine their optimal R&D allocation between short, mid, and long range projects. To learn more, visit FCLTGlobal.org 

About FCLTGlobal 

FCLTGlobal is a non-profit organization that develops research and tools that encourage long-term investing. Our Membership is comprised of global asset owners, asset managers, and companies that play a leading role in rebalancing capital markets for sustainable growth. Please visit www.fcltglobal.org for more information.  

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