The Changing Face of R&D in the US Technology Industry

Strategic Insights -

The traditional model of research and development (R&D) in the US technology industry, where large companies like IBM and Lucent Technologies invest in fundamental research, is being replaced by a new approach. This shift is driven by the increasingly demanding nature of investors, who seek to target specific types of investment risk. As a result, companies like Cisco Systems have adopted a more focused approach to R&D, concentrating on product development rather than fundamental research. This change has led to the rise of the market for R&D equity, where shareholders can invest directly in research projects.

Key Takeaways:

  • Four out of the top five high technology firms in the US are East Coast companies with long histories, indicating a shift away from traditional R&D funding models.
  • Companies like Lucent Technologies and IBM follow the traditional model of large laboratories conducting fundamental research, but this approach is being replaced by more focused R&D spending.
  • The rise of the market for R&D equity has led to the growth of companies like Cisco Systems, which focus on product development and sell equity in their research projects to investors.
  • Many large information technology companies and pharmaceutical companies have adopted the Cisco approach, investing in venture capital arms to influence the development of new technologies.
  • Juniper, a relatively new player in the internet router market, has stayed independent and is competing with Cisco, highlighting the risks of the new R&D model.
  • The US tax loophole of "in-process research & development" is being axed, which may reduce the tax benefits of acquiring research-rich technology companies.
  • The market for R&D equity is closely associated with popular investment crazes and boom and bust markets, with the internet industry currently experiencing a similar cycle to biotechnology in the 1980s.

Statistics:

  • Four out of the top five high technology firms in the US are East Coast companies.
  • Lucent Technologies' Research and Development spending rose 457% due to its acquisition of Digital Equipment.
  • Cisco Systems does not conduct fundamental research, focusing instead on product development.
  • Almost every large information technology company and many large drug companies have adopted venture capital arms to influence the development of new technologies.
  • Juniper's market share in the internet router market is competing with Cisco's market share.

Sources:

  • Financial Times, "The Changing Face of R&D in the US Technology Industry" (no date provided, but copyright stated to be 1999)