Businesses that increase their investment in innovation during a recession reach the upturn with improved products and services, thereby gaining an advantage over competitors that have reduced research and development (R&D) to protect profits.
Increasing R&D at a time when sales are likely to be falling is a sign of the management’s confidence that the company’s strategy is sound, its financial position is strong and the R&D department will deliver the new and improved products justifying the increased investment. These are all positive factors for potential investors, who are usually rewarded by share-price increases during the upturn.
Renishaw (LSE: RSW), the precision-metrology specialist, is a good example: it announced it was increasing R&D as its sales decreased during a downturn and then went on to demonstrate the benefits. As author of the government’s annual R&D Scoreboards, I invited David McMurtry, chairman and CEO of Renishaw, to write the industrial commentary for the 2002 Scoreboard.
He said “Renishaw saw its sales fall 17% in its last financial year as demand in the metal-cutting, electronics and semiconductor sectors contracted... our organic growth strategy has allowed us to build a business with turnover in excess of £100m and (despite the contraction in demand) we continued to expand our R&D investments – a 15% increase last year to £12.1m – the engine that will secure the long-term success and growth of our business”.
Paving the way for long-term growth
Four years later, McMurty
