Driving Research & Development in a Downturn

In challenging times, the natural reaction of many businesses is to minimise expenditure in an attempt to ride out the storm. Research and development investment may be seen as an unjustifiable expense. However, studies of past recessions have shown that companies that maintain, or even increase, research and development levels during downturns outperform others when market conditions improve.

In a 2003 study of nearly 1000 businesses from around the world and across a wide range of industries, Roberts found that investments in marketing, product development and customer-perceived quality were “good costs” that should be increased during market recessions in order to maximise growth and market share upon recovery.1 As shown below, firms that increased spending on marketing and product development increased their ROCE (return on capital employed) and market share over the recovery, as did firms whose product quality was seen to have increased.

Marketing Spend

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Chart by Visualizer
Chart by Visualizer

Product Development Spend

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Chart by Visualizer
Chart by Visualizer

Customer-Perceived Quality

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Chart by Visualizer
Chart by Visualizer

Others have found that research and development spending increases growth in times of market stability, and that this effect is magnified during recessions.2 In the period from 2004 to 2009—spanning the 2008-2009 global financial crisis—Norwegian firms with low R&D spending grew by 29% on average, while firms with high R&D spending grew by 103%. This effect was most pronounced during the crisis – the high R&D firms grew by over 10% in this period, while other firms contracted.

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Investments in innovation and product development may not pay immediate dividends, with benefits typically not accruing until after the worst of the recession has passed. This illustrates the importance of long-term strategic thinking over knee-jerk reaction. The passing of the baton from the US to Japan in the field of semiconductor manufacture illustrates this point.

In the early 1970s, US suppliers of semiconductor devices outsold their Japanese counterparts by more than two to one. However, by the end of the 1980s they had fallen behind the Japanese. Writing for the MIT Sloan Management Review, Ghemawat notes that in the aftermath of the 1974-1975 recession, US companies eased up on investment, while Japanese companies held firm.3 In such an innovation-driven and rapidly changing industry, this brief pause was enough to fall behind. To take a specific case, US manufacturers failed to invest in production capacity for 16 kilobyte dynamic random access memory (DRAM) chips during the downturn, which left them unable to meet demand from IBM when the upturn came. This forced IBM to turn to Japanese suppliers, who by 1979 had captured 43% of the US market for 16 k DRAM chips.

Of course, businesses operate under financial constraints and any money spent on research and development is money that is unavailable to spend on other things. The right level of investment will be a balance between the competing requirements of retaining sufficient resources to see out the difficult times and setting the stage to benefit once market conditions improve. One way that this balancing act can be made easier is for the Government to subsidise R&D costs, which has been shown to increase overall R&D expenditure.4 Research and development during difficult times benefits a society as a whole, as does a thriving and competitive market, making it an ideal use of public funds.5 The Singaporean Government has recognised the importance of this and recently increased funding levels available under its Enterprise Development Grant up to 90% for companies severely affected by COVID-19. In Australia, the ATO is allowing IP assets to be immediately deducted against taxable income, rather than depreciated, under an expanded Instant Asset Write Off scheme. In New Zealand, a number of funding sources and tax credits are available. In addition, Callaghan Innovation has indicated increased flexibility in relation to R&D grants due to the impact of COVID-19, and we hope new programmes will be forthcoming soon.

The message from history is clear: money spent on research and development during a recession has been shown to have general and specific economic benefits. A positive strategy including an active research and development programme can have many other positive effects at the company level. It allows the company to retain quality staff by giving them satisfying and engaging work when they might otherwise be underutilised, retain existing clients and gain new ones with superior products, and be ready to capitalise on new products and skilled staff during the recovery. Where companies are not in a position to invest in research and development, there is a role for Government to provide subsidies to promote public well-being and economic growth.

1 Roberts, “What strategic investments should you make during a recession to gain competitive advantage in the recovery?”, Strategy & Leadership, Vol. 31 Iss 4 pp. 31–39.

2 Lome et al, “The effect of R&D on performance: Do R&D-intensive firms handle a financial crisis better?”, Journal of High Technology Management Research.

3 Ghemawat, “The Risk of Not Investing in a Recession”, MIT Sloan Management Review Spring 2009, Vol 50 No. 3.

4 Hud et al, “The Impact of R&D Subsidies During the Crisis”, Centre for European Economic Research Discussion Paper No. 14-024.

5 Barlevy, “On the Cyclicality of Research and Development”, Economic Research, Federal Reserve Bank of Chicago.

A Place for Intellectual Property in Times of Crisis

The impact of Covid-19 has made itself felt internationally and is likely to stretch considerably into the future.  In times of crisis, focus necessarily turns to home and health, and doing what you must to ensure day to day life is manageable.  But it is important to bear in mind that, eventually, we will come out the other side and we will need to pick up life in the new normal.

While aspects of life that aren’t essential may be easily sacrificed in the short term, you should also have a plan in place for the new normal.  Your IP rights should form part of that plan.

What Should You Do?

Step 1 – Review what you have

If you already have registered IP protection in place, now is a good time to seek an overview of what you have covered and when renewal of rights fall due.

Review what IP you have in use or under development that is not covered by your existing registered rights.  Do you have any current or projected IP that could provide a competitive advantage in the future?

Step 2 Identify potential vulnerabilities

Brand and marketing experts are predicting a dramatic increase in counterfeit products and mis-used trade marks as commerce necessarily moves onto a digital and social media platform.

A review now should allow you to identify gaps in your protection.

Step 3 – Develop a strategy for best positioning

Discussions with your IP provider with a clear understanding of budgets will help you set up a strategy to maximise your protection. 

This includes having a plan to manage renewal of already registered IP rights, finding options to firm up any vulnerabilities, and strategically securing fresh registered IP rights to protect your points of competitive advantage.

Do not be shy about having these conversations now.  Working with your IP provider at the early stage of planning means you can structure your approach and should be able to avoid the need for urgent, and potentially costly, protective steps down the line.

Step 4 – Maintain vigilant review of the market place

It is dangerous to assume that because we are in a time of crisis, other traders won’t try to take advantage of a lapse in rights, or perceived inability to enforce rights.

Quick action against obvious infringements may be a cost-effective way to stop third parties gaining a toehold that will affect your ability to re-enter the market.

What now?

With the right tools created now, you can have a path to success in the new normal.

Talk to us today to review your IP portfolio.