Low productivity growth is a concern for policymakers across the globe. A recent report by McKinsey calculated that productivity growth over the next 50 years would need to be 80% faster than over the last half a century to compensate for ageing populations and slower employment growth. However from China to the United States, the efficiency of production is falling, if not in outright decline. If productivity does not pick up again then living standards will fall.
The OECD[1] highlighted weak investment - which has failed to rebound following the financial crisis as it did after previous recessions - as a particular drag on productivity in its recent Economic Outlook. But I am pleased to see technology businesses bucking the global trend: over the past 12 months 46% have looked to boost investment in research and development (R&D), compared to just 29% of their counterparts in all sectors, according to the International Business Report (IBR), our quarterly mid-market confidence tracker.
Of course, R&D is particularly important in technology. It is vital to providing businesses with sustainable future revenue streams; the global economy is littered with the skeletons of tech giants - such as RIM and Nokia - which failed to think ahead of the curve. With an innovation cycle measured in months, 'innovate or die' is the mantra for the whole industry. All sub-sectors, from software and telecoms to mobile and life sciences, need a continuous R&D focus.
With all these ideas floating around it is perhaps no surprise that 57% of tech businesses are planning to launch a new product or service over the next 12 months, compared an all-sector average of 35%. But one continuous challenge is how to allocate R&D dollars; into deeper products features or improved product performance? More features or more customers? Platform play or single? Businesses should not launch products or services simply to show off something new and flashy; there should be sound business strategy underpinning all investment.
Another challenge for business leaders is that reducing R&D funding to improve margin performance is often rewarded - at least in the short-term - with greater investor interest. This trade-off between short-term profitability and long-term growth is a broader governance issue for boards to address but reducing innovative capacity to satisfy quarterly financial reports is not a sustainable business practice.
If businesses want to avoid costly outlay on R&D - the return on which is hard to quantify up front - then they can take a short cut by buying competitors or purchasing their technology. IBR data shows just over a third of tech businesses planning to grow through acquisition over the next three years, slightly ahead of the all-sector average, with close to half looking to do so in order to pick up new technology or established brands. Businesses could also opt to outsource the entire R&D function which makes it easier to dial investment up or down as necessary.
What's certain is that the global economy could do with more businesses thinking like their tech counterparts. The OECD report calls on governments to facilitate private investment by removing barriers to market competition and financing. And businesses need to remember help is out there: for example, Ireland offers R&D tax credits of up to 25% and just last month, the US congress voted to permanently extend the R&D tax credit up to 20%.
My advice to business leaders is simple: do your research and see what help you can get. Investing is risky, but perhaps not as risky as waiting for your competitors to make the first move.
[1] Organisation for economic cooperation and development
