New R&D tool, developed at Olin, could add $1 trillion to public firms’ market value

The nation’s top 20 publicly traded firms could have added nearly $1 trillion to their market value if, in 2010, they had used a new tool, known as the research quotient (RQ), to determine their research and development (R&D) budgets, says its creator, Anne Marie Knott, PhD, associate professor of strategy at Washington University in St. Louis.

Anne Marie Knott

“The longer-term benefits are even greater,” Knott says, “as RQ also allows companies to more closely link changes in R&D strategy, practices and processes to profitability and value.”

Knott’s metric, featured in the May 2012 “Spotlight on Innovation” issue of the Harvard Business Review, is designed to help companies address several key questions that underlie R&D strategy:

  • How does a company know what kind of return it is getting from R&D?
  • Is it better at R&D than the competition?
  • How much should it be spending and what can it do to improve the effectiveness of those investments?

“I had been hoping for a measure like this since before becoming an academic,” Knott says. “Existing measures of innovation, such as R&D intensity and product/patent counts, don’t allow firms, policy makers or academics to know the answers to these big questions.”

Knott’s RQ metric allows companies to estimate the effectiveness of R&D investment relative to the competition.

“It lets them see how changes in their R&D expenditure affect the bottom line and, most important, their company’s market value,” Knott says.

“My research, which includes a comprehensive analysis of all publicly traded companies in the U.S., suggests that if the top 20 firms traded on U.S. exchanges had optimized their R&D spending in 2010 using the RQ method, the potential collective increase in market cap would be an astonishing $1 trillion.”

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