The 2008 R&D Scoreboard. The top 850 UK and 1400 global companies by R&D investment. Commentary & Analysis

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1 The 2008 R&D Scoreboard The top 850 UK and 1400 global companies by R&D investment Commentary & Analysis

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3 Contents 1 Ministerial foreword Summary... 4 Highlights... 4 What the Scoreboard means for companies and investors... 4 The UK s top R&D companies... 5 The global picture... 5 Key facts Introduction... 7 About the 2008 R&D Scoreboard... 7 How is the Scoreboard compiled?... 7 Where to go for further information The pattern of R&D an overview... 9 Introduction... 9 The scale of R&D... 9 The sectoral distribution of R&D The concentration of R&D in the UK The UK s biggest investors in R&D The global leaders in R&D Key sectoral trends in R&D a comparison of UK and global performance Introduction Summary The scale of R&D expenditure by sector The intensity of R&D capex and employment Performance: R&D, sales and operating profits R&D sales R&D and profits Sector Summaries Aerospace & Defence Automobiles & Parts Banks Fixed Line & Mobile Telecommunications Pharmaceuticals & Biotechnology Software & Computer Services The pattern of R&D across different categories of firm in the UK Introduction Summary Differences in R&D between firms by value of sales Differences in R&D between different types of ownership Listed and unlisted companies UK- and foreign-owned firms R&D intensity of firms The biggest changes in the UK Appendix A: Scope, definitions and limitations of the R&D Scoreboard Scope of the R&D Scoreboard Definitions Sources Limitations Appendix B: Summary of UK Appendix C: Summary of G Commentary & Analysis The 2008 R&D Scoreboard 1

4 1 Ministerial foreword 1 Ministerial foreword By Lord Paul Drayson Minister of State for Science and Innovation A great deal has happened since we published the 2007 R&D Scoreboard a year ago. We are now in the midst of a global economic downturn, whose speed and ferocity has taken many by surprise. Lord Paul Drayson Minister of State for Science and Innovation The Government is doing all it can to help business through these difficult times. We have responded quickly to shortterm challenges without losing sight of long-term goals. That has meant measures to ease cash flow and finance problems for UK firms at the same time as we build on our record investment in science and research. This country s success ultimately depends on a strong skills base and dynamic R&D both driving an innovative and competitive economy. The Department for Innovation, Universities and Skills is responsible for boosting our national capability in these areas, and the Scorecard is an important tool for tracking progress on R&D investment not just in high-value products and services but in operational effectiveness. The latest Scoreboard shows that many UK companies already compete with the world s best through that combination of a highly-skilled workforce and the profitable exploitation of R&D. Some figures in this report do reflect a more favourable situation than now applies; companies, especially in financial services, will have cut back on R&D. 2 The 2008 R&D Scoreboard Commentary & Analysis

5 However, for the whole period under review, we ve seen a six per cent increase in R&D investment by UK firms. This is not the time to back away from such investment. We must be ready to seize those global opportunities that will inevitably arise. The Government will continue to play its part by stimulating R&D investment. The recent changes to the Research and Development Tax Credit, for example, will bring additional benefits to small, medium and large companies alike. As Minister for Science and Innovation, I am determined to work with business to find further ways in which we can get through the downturn and emerge stronger. This country s success ultimately depends on a strong skills base and dynamic R&D both driving an innovative and competitive economy. Commentary & Analysis The 2008 R&D Scoreboard 3

6 2 Summary Summary 2 Highlights The 850 UK firms making the largest investment in Research & Development (R&D) in 2007 grew their R&D by 6% to 21.6 billion in the last year. The 88 UK companies with the most R&D which are part of the 1,400 largest global investors - increased their investment by 10.3% -- more rapidly than their global peers. In contrast, R&D spending by other smaller UK investors amongst the 850 most active UK companies grew 1.2%. Oil & gas production was the fastest growing sector in 2007, increasing spending by 36%. The pharmaceuticals & biotechnology sector remained the largest investor overall in R&D in the UK. Pharmaceuticals & biotechnology companies also remained the biggest investors in R&D worldwide, having remained ahead of firms in the technology sector. What the Scoreboard means for companies and investors The 2008 R&D Scoreboard draws on data on R&D expenditure and other measures of financial performance which have been taken from the published accounts of UK-based and global companies. It uses the latest accounts as of 28th July 2008, and refers to business activity largely in This analysis offers insights to both companies examining their R&D investment needs and to analysts and investors concerned with identifying good performance in companies. 4 The 2008 R&D Scoreboard Commentary & Analysis

7 The UK s top R&D companies In 2007, the 850 UK companies undertaking the most R&D (the UK850 ) increased their investment by 7% compared to the previous year to 21.6 billion. This was largely due to increased spending by firms in the pharmaceuticals, oil and gas production, software & computer services and banking sectors. The UK s forest and paper sector showed the fastest growth in R&D spending over the last year it was up by 871% in the last year. Pharmaceuticals remained the largest sector in the UK it was up by 7% over the previous year. Of the sectors making the most significant investment in R&D, firms in both the oil and gas producing and banking sectors reported average R&D growth of 36% and 19% respectively. R&D is a key expenditure in many sectors. UK aerospace, automobiles, pharmaceuticals and software and technology firms invested substantially more in R&D than they earned as profits. The UK s 88 biggest R&D investors which also form part of the G1400 largest R&D spenders worldwide conducted two thirds of the UK850 s R&D. They grew their R&D by 10.3% over the previous year whereas their global peers averaged a 9.5% increase. The UK850 s R&D has grown significantly faster (7%) than their number of employees, which increased by 4% over the same period. In the last year, for the UK850 firms as a whole, whilst sales growth has outstripped R&D growth, R&D has increased as a proportion of their sales. The global picture Global R&D spending by the G1400 rose by 9.5% to 274 billion. It continues to be dominated by companies registered in just five countries the USA, Japan, Germany, France and the UK which contributed 79% of R&D by the G1400. Globally, average R&D intensity remains broadly similar at 3.3% of sales. Commentary & Analysis The 2008 R&D Scoreboard 5

8 2 Summary R&D investment in the global pharmaceuticals sector grew by 12% in the last year; it has remained as the largest global R&D sector. Other rapidly growing sectors amongst the ten largest investors were the software and technology and hardware sectors which both grew at more than 12%. Analysis in this Scoreboard suggests that, overall; the UK850 companies in the G1400 have increased their R&D expenditure more quickly than their global peers in the aerospace, fixed line communications, oil and gas producing and software sectors. In many sectors, however, UK firms increased their R&D more slowly than their global peers such as in banking, electronic and technology sectors. Key Facts The 850 UK companies that invested the most in R&D spent 21.6 billion in 2007, compared with the 20.3 billion in % of UK R&D is conducted by the hundred most active companies. More than one fifth of R&D activity by the 88 UK companies represented in the G1400 takes place in the pharmaceuticals and aerospace sectors. Globally, the 1,400 companies most active in R&D invested 274 billion in , an increase of 9.5% on the previous year: the 88 UK companies in this group increased their R&D spend at a faster rate (10.3%). Almost 80% of global R&D occurs in five countries: USA, Japan, Germany, France and the UK. Global R&D intensity (R&D expenditure as a proportion of sales) has remained broadly similar to the previous year at 3.3%. 6 The 2008 R&D Scoreboard Commentary & Analysis

9 Introduction 3 Introduction This short report summarises the findings of the 2008 R&D Scoreboard, an investigation of the financial performance of the top UK and global corporate investors in R&D. About the 2008 R&D Scoreboard This is the 18th annual edition of the R&D Scoreboard, which is published by the Department for Innovation, Universities & Skills (DIUS) in collaboration with the Department for Business, Enterprise & Regulatory Reform (BERR). 3 The Scoreboard is an international league table of the companies investing most in R&D. It is designed as a benchmarking tool for companies, investors and policy-makers. Sixteen leading business and professional organisations endorse the Scoreboard as a source of information for their companies and their shareholders when considering the amount invested in R&D as part of their innovation process and business strategy; a list of the endorsers is inside the back cover. This report summarises the latest data on investment in R&D and financial performance of the 850 most active UK companies (including foreign-owned companies whose R&D is conducted and reported in the UK850. It also includes data on the 1,400 most R&D active companies globally, an increase in coverage from the 1,250 companies included in last year s Scoreboard. The Scoreboard highlights the main trends discernible in the UK and global data. How is the Scoreboard compiled? The Scoreboard data are taken from the published accounts of UKbased and global companies by Company Reporting Limited, using the most recent accounts as of 28th July For most companies the data represent their accounts for the calendar year 2007 or for the financial year 2007/08. Commentary & Analysis The 2008 R&D Scoreboard 7

10 3 Introduction There are some other important aspects of the data which affect their interpretation: Not all companies disclose their R&D investment in published annual reports and accounts and these are excluded from the Scoreboard. For many diversified groups, the R&D investment disclosed in their accounts arises from only part of their activities, whereas sales, operating profits and other data such as market capitalisation reflect all their activities. As a result, some statistics derived for these companies will understate the R&D performance of the divisions that are active in R&D. The R&D investment reported in company accounts is independent of the location of the R&D activity which means that the UK850 data indicate the overall level of R&D funded by UK companies, not all of which is carried out in the UK. In contrast, other information such as the Business Enterprise R&D (BERD) data generated by the Office for National Statistics (ONS) focus on R&D activity within the UK, independent of the source of funding, and exclude R&D carried out by UK companies in other countries. The means that the Scoreboard complements country-level R&D data; it is not a sound basis for comparisons between countries. The composition of the UK850 and G1400 lists fluctuates from year to year with changes in individual companies spending patterns. Unless otherwise stated, growth rates quoted in this document are based on the prior performance of the current list of UK850 and G1400 firms (rather than that of previous lists of firms). Further details of the scope of the Scoreboard, the key definitions used and the resulting limitations of the data are set out in Appendix A. The analysis is principally the work of PricewaterhouseCoopers LLP. Where to go for further information The accompanying CD contains full data on all the companies included, additional detailed analysis and overviews of six key sectors. This information is also available online at 8 The 2008 R&D Scoreboard Commentary & Analysis

11 The pattern of R&D an overview 4 The pattern of R&D an overview Introduction This section provides an overview of the pattern of investment in R&D in 2007 in the UK and globally across sectors and between the different categories of firms highlighted by this year s Scoreboard. It also summarises the key changes in R&D since last year and highlights the leading investors in R&D in the UK and globally. The scale of R&D 4 The 850 largest corporate spenders on R&D in the UK (the UK850) invested 21.6 billion in 2007, 7% more than these companies spent the previous year. Even allowing for inflation, investment in R&D increased significantly. They represent further evidence of the UK s continued transformation into a knowledge-based economy. This growth in 2007 was achieved in largely benign economic conditions. Since then, economic uncertainties have increased and it will be interesting to see how far investment in R&D is sustained in the coming years through the global economic slow down. The 1,400 companies in the world most active in R&D in 2007 (the G1400) invested 274 billion, an increase of 9.5% over the previous year. This R&D was highly concentrated in firms based in five countries; 79% of the investment was undertaken by companies from the USA, Japan, Germany, France and the UK and 1,035 (74%) of the companies come from these countries (see Figure 1). Figure 1: Distribution of R&D expenditure among G1400 by country (2007) Commentary & Analysis The 2008 R&D Scoreboard 9

12 4 The pattern of R&D an overview The sectoral distribution of R&D R&D spending by companies in the UK850 was dominated by five sectors: pharmaceuticals and biotechnology, aerospace and defence, software & computer services, fixed line communications and automobiles and parts, which together accounted for 60% of R&D (see Figure 2). The pharmaceuticals and biotechnology sector was by far the largest investor, accounting for 37% of the UK850 total. It invested over six times as much as any of the other four sectors none of which invested more than 6% of the UK850 total. Figure 2: Distribution of UK850 R&D expenditure (2007) The domination of firms in the five biggest sectors has declined steadily over the last three Scoreboards: their share of investment in R&D by the UK850 has declined from 65% two years ago, to 63% last year and 60% this year. Globally, five sectors also dominated expenditure by the world s leading R&D investors. Three of the sectors were also amongst the five largest spending sectors in the UK pharmaceuticals and biotechnology, automobiles and parts and software & computer services and two were different, technology and hardware equipment and electronic and electrical equipment. 10 The 2008 R&D Scoreboard Commentary & Analysis

13 The pharmaceuticals and biotechnology sector remained the largest sector globally, ahead of technology and hardware equipment, for the second year running. However, in contrast to the UK, the three biggest spending sectors globally have broadly similar shares of total R&D investment among the G1400. They accounted for more than 68% of the investment by the G1400 (see Figure 3). The picture this year is similar to the previous year, where the same five sectors also accounted for more than 68% of the investment by the G1400. Figure 3: Distribution of G1400 R&D expenditure (2007) While R&D expenditure amongst the G1400 was relatively concentrated in the leading countries firms, the sectors in which those firms operate varied significantly between the leading countries (see Figure 4). Both the USA and France and, to a lesser extent, Japan had relatively diversified portfolios of R&D whereas Germany was more concentrated, especially in automobiles and parts. R&D in South Korea and Switzerland remained highly specialised in electronic and electrical equipment and pharmaceuticals and biotechnology respectively. The 88 UK firms in the G1400 were also quite specialised, with pharmaceuticals and biotechnology dominating, but the UK88 had the largest amount of R&D 52% -outside the major sectors of all the leading countries covered by the analysis. Commentary & Analysis The 2008 R&D Scoreboard 11

14 4 The pattern of R&D an overview Figure 4: Growth in R&D expenditure by sector across G1400 ( ) The concentration of R&D in the UK In 2007, the 88 UK firms in the G1400 accounted for 66% of R&D by the UK850. The three largest sectors - pharmaceuticals and biotechnology, fixed line communications and banks - accounted for more than half (60%) of R&D spending by the 88 UK firms in the G1400. Likewise, the aerospace and defence sector accounted for 5% of R&D spending by the 88 UK firms in the G1400. The share of total R&D expenditure by the UK850 attributed to its 100 biggest investors (including those in the G1400) has continued to decline over the last three years. The share declined to 81% from 83% the year before. The UK s biggest investors in R&D Table 1 lists the 25 UK companies which invested the most in R&D in Two companies from the pharmaceuticals and biotechnology sector continued to dominate the list: GlaxoSmithKline and AstraZeneca between them invested 5.8 billion, some 26% of the UK850 total. Since last year the amount spent by the two firms on R&D has increased from 5.5 billion and the proportion of the UK850 total has remained consistent. The biggest climbers in the Top 25 were Shire, Royal Bank of Scotland and BP. Amongst the foreign-owned UK companies in the list, Airbus was the largest investor in R&D ( 397 million), despite a fall in its R&D. Ford dropped three places to ninth. 12 The 2008 R&D Scoreboard Commentary & Analysis

15 BAE Systems expenditure on R&D in 2007 is considerably less ( 1,072m) than the figure quoted in last year s Scoreboard and, indeed, in the years before then. This reflects the company s restatement of its R&D spend to exclude that funded by its customers. It should be noted that the UK850 compares the global operations of UK-owned firms and subsidiaries of major multinationals; some multinationals do not prepare consolidated accounts containing an R&D figure for their UK operations and are, therefore, omitted from the Scorecard despite carrying out substantial R&D. They may also be more subject to year-on-year variability of results based on changes in financial practice within their group (e.g. choosing to fund R&D locally or from head office). Table 1: Top 25 UK companies by R&D expenditure (2007) Rank 2008 Company Sector R&D ( m) Growth in R&D over last year (%) Rank GlaxoSmithKline Pharmaceuticals & biotechnology 3, AstraZeneca Pharmaceuticals & biotechnology 2, BT Fixed line telecommunications 1, Unilever Food producers Royal Dutch Shell Oil & gas producers Royal Bank of Scotland Banks Rolls-Royce Aerospace & defence Airbus*# Aerospace & defence Ford Motor *# Automobiles & parts HSBC Banks BP Oil & gas producers Shire Pharmaceuticals & biotechnology Pfizer*# Pharmaceuticals & biotechnology Vodafone Mobile telecommunications Land Rover (now Ford LRH)*# Automobiles & parts Reuters (now Thomson Reuters) Media Jaguar Cars*# Automobiles & parts n/a 18 BAE Systems Aerospace & defence Roche Products* Pharmaceuticals & biotechnology n/a 20 Nokia*# Technology hardware & equipment Commentary & Analysis The 2008 R&D Scoreboard 13

16 4 The pattern of R&D an overview Table 1: Top 25 UK companies by R&D expenditure (2007) (continued) Rank 2008 Company Sector R&D ( m) Growth in R&D over last year (%) Rank Tesco Food & drug retailers Smiths General industrials BAT Tobacco n/a 24 Telefonica O2 Europe (now Telefonica Europe)* Mobile telecommunications n/a 25 Barclays Banks n/a * - foreign owned firm # - accounts not prepared using IFRS The global leaders in R&D There were significant changes in the 25 leading global investors in R&D in Microsoft invested the most of any company having been fourth in the list in the previous year. The biggest climber in the Top 25 was Nokia, which increased investment in R&D by 42% over the last year. The firm which dropped the most places in the Top 25 was Siemens, which fell from eighth place to twenty-second. Other significant rises were General Motors (to second), Roche (to eighth) and Volkswagen (to ninth). The global list is dominated by firms from the automobiles and parts and pharmaceuticals and biotechnology sectors. Compared with last year s Scoreboard, there is now one more UK firm in the 25 largest global investors in R&D: AstraZeneca joined GlaxoSmithKline amongst the largest investors in R&D in 2007 having leaped to nineteenth position in this year s Scoreboard (see Table 2). GlaxoSmithKline, on the other hand, has fallen seven places from seventh position to thirteenth over the course of the year. 14 The 2008 R&D Scoreboard Commentary & Analysis

17 Table 2: Top 25 global companies by R&D expenditure (2007) Rank 2008 Company Sector Country R&D ( m) Growth in R&D over last year (%) Rank Microsoft# Software & computer services USA 4, General Motors# Automobiles & parts USA 4, Pfizer# Pharmaceuticals & biotechnology USA 4, Toyota Motor# Automobiles & parts Japan 4, Nokia Technology hardware & equipment Finland 3, Johnson & Johnson# Pharmaceuticals & biotechnology USA 3, Ford Motor# Automobiles & parts USA 3, Roche Pharmaceuticals & biotechnology Switzerland 3, Volkswagen Automobiles & parts Germany 3, Daimler Automobiles & parts Germany 3, Sanofi-Aventis Pharmaceuticals & biotechnology France 3, Samsung Electronics # Electronic & electrical equipment South Korea 3, GlaxoSmithKline Pharmaceuticals & biotechnology UK 3, Novartis Pharmaceuticals & biotechnology Switzerland 3, Intel# Technology hardware & equipment USA 2, IBM# Software & computer services USA 2, Robert Bosch Automobiles & parts Germany 2, Matsushita Electric# Leisure goods Japan 2, AstraZeneca Pharmaceuticals & biotechnology UK 2, n/a 20 Honda Motor# Automobiles & parts Japan 2, Alcatel-Lucent Technology hardware & equipment France 2, n/a 22 Siemens Electronic & electrical equipment Germany 2, Merck# Pharmaceuticals & biotechnology USA 2, Sony# Leisure goods Japan 2, BMW Automobiles & parts Germany 2, * - foreign owned firm # - accounts not prepared using IFRS Commentary & Analysis The 2008 R&D Scoreboard 15

18 5 Key sectoral trends in R&D a comparison of UK and global performance Key sectoral trends in R&D a comparison of UK and global performance 5 Introduction This section analyses the key trends in R&D expenditure among the different sectors, both globally and in the UK. First, it considers the changing scale of R&D expenditure and compares this to that of other business inputs, notably capital expenditure and employment. Second, it examines the ratio of companies investment in R&D to their sales and profits. Summary Table 3 summarises the key changes in R&D and other measures of business performance amongst the UK850 over the last year. The key points to note are that: R&D investment by the UK850 increased by 7% over the last year; the fastest growing of the key sectors were oil & gas producers, which increased its spending by 36%, and banks, which increased its spending by 19%; the biggest contributors to growth in R&D amongst the UK850 were pharmaceuticals & biotechnology, oil & gas producers, banks and fixed line telecommunications: between them, firms in these four sectors contributed over three quarters of the net change in R&D investment. 16 The 2008 R&D Scoreboard Commentary & Analysis

19 Table 3: Key sectoral trends across UK850 (2007) 1 Rank 2008 R&D in 2007 ( m) Change in R&D over last year (%) R&D as % of capex (%) Change in employees over last year (%) Change in sales over last year (%) Change in profits over last year (%) Pharmaceuticals & biotechnology 7, % 214% 1.6% 4.7% -2.4% Aerospace & defence 1, % 137% 4.9% 10.2% -5.0% Software & computer services 1, % 224% 10.8% 12.8% 3.7% Fixed line telecommunications 1, % 50% 3.2% 2.5% -9.2% Automobiles & parts 1, % 87% -1.4% 8.7% 37.0% Banks 1, % 14% 11.1% 15.0% 7.1% Oil & gas producers % 4% -1.2% 9.7% 2.6% Technology hardware & equipment % 261% 2.7% 9.1% -37.5% Food producers % 40% -1.7% 1.3% -8.0% Electronic & electrical equipment % 160% 0.8% 5.6% 17.2% Other sectors 4, % 160% 3.8% 10.2% 11.6% Total 21,430 The scale of R&D expenditure by sector Figure 5 shows the pattern of change in the level of R&D investment over the last five year among the ten largest sectors in the UK850 defined by their investment in R&D. It highlights the continued, strong rises in pharmaceuticals and biotechnology and fixed line communications. Oil and gas producers, software & computer services firms and banks have increased their investment in R&D over the five year horizon although the banks have not disclosed significant R&D investment throughout the period (e.g. banks). Investment in R&D by firms in both the automobiles and parts and food production sectors has fallen in absolute terms over the five year period. Growth in the UK fixed line communications sector was once again driven by BT. The banking sector was driven by strong performance across the board, in particular Barclays which increased its R&D spending by 151% over the four years and Alliance and Leicester which increased its R&D spending by 1107% over the same period. 1 This table excludes any firm for which all the data required to derive each of the measures is not available. Commentary & Analysis The 2008 R&D Scoreboard 17

20 5 Key sectoral trends in R&D a comparison of UK and global performance Figure 5: Growth in R&D expenditure by sector across UK850 ( ) Figure 6 shows the growth in investment in R&D across the ten largest sectors in the G1400 over the last five years. The overall rate of increase in investment in R&D among the UK850 between 2003 and 2007 was 38% compared with 41% for the G1400. This is not a like for like comparison since the UK850 includes smaller firms and foreign subsidiaries, which are not present in the G1400. A better comparison is with the 88 UK firms in the G1400. These firms have increased their investment in R&D by 40% over the same period. Figure 6: Growth in R&D expenditure by sector across G1400 ( ) 18 The 2008 R&D Scoreboard Commentary & Analysis

21 Investment in R&D grew, on average, more quickly in the UK850 than in the G1400 across the following sectors: aerospace and defence, fixed line telecommunications, oil and gas producers and software & computer services sectors. In contrast, food producers, automobiles and parts, pharmaceuticals and biotechnology, technology and hardware equipment, banks and electronic and electrical equipment sectors increased their investment in R&D faster in the G1400 than the UK850. The intensity of R&D capex and employment Figure 7 plots investment in R&D as a proportion of capital expenditure against investment in R&D per employee for firms in the UK850. Each point on the chart represents an individual sector. The chart shows little change from previous years. Figure 7: R&D per employee and R&D/capital expenditure in UK 850 (2007) Technology hardware & equipment Leisure goods Industrial metals Performance: R&D, sales and operating profits R&D and sales Across the UK850, the ratio of investment in R&D to sales averaged 1.7% in This average figure masked considerable variations across sectors: in one sector pharmaceuticals and technology the ratio of R&D to sales exceeded 8%, but the large volume of sales generated by the banking, telecommunications and oil and gas sectors relative to investment in R&D reduced the overall ratio across the UK850. Commentary & Analysis The 2008 R&D Scoreboard 19

22 5 Key sectoral trends in R&D a comparison of UK and global performance In contrast, for the largest US investors in R&D, the average ratio of R&D to sales stood at 4.4%, slightly below last year s figure of 4.6%. As discussed the reason for the US firms having a higher average ratio of R&D to sales is due to the different sector mix of UK and US firms. Overall, sales grew faster amongst the UK850 than R&D investment over the last 12 months. This contrasts with the previous year where investment in R&D grew faster than sales. The overall picture, however, masks significant differences between sectors: R&D grew faster than sales in pharmaceuticals and biotechnology the biggest investor in R&D in the UK as well as the banking sector, fixed line communications, mobile telecommunications and oil and gas production; and sales grew faster than investment in R&D in aerospace and defence, automobiles and parts, technology hardware and equipment and food producers. This pattern is reflected in Figure 8 which shows investment in R&D as a proportion of sales over the last five years. Figure 8: R&D expenditure as a proportion of sales by sector in the UK850 ( ) 20 The 2008 R&D Scoreboard Commentary & Analysis

23 R&D and profits Figure 9 shows firms investment in R&D as a proportion of their operating profits in 2007 by sector for both the UK850 and G1400. For two of the UK s main R&D sectors, notably automobiles and parts and technology hardware and equipment, the value of their investment in R&D was substantially more than their operating profits. The technology hardware and equipment sector, for example, invested the equivalent of 232% of its profits in R&D and the automobiles and parts sector invested 200% of its profits. This reflects the fact that in both sectors research and innovation is a crucial value-adding activity and, for companies to survive longer term, they need to sustain their level of investment. In contrast, for firms in the banking and oil and gas producing sectors, the ratio of the level of investment in R&D to their operating profits was low (3.5% and 2% respectively). Of the 15 sectors making the biggest investments in R&D - aerospace and defence, automobiles and parts, pharmaceuticals and biotechnology, software & computer services, technology hardware and electronic and electrical equipment - the value of their investment in R&D was substantially more than their operating profits. The performance of the UK850 firms contrasts with that of firms globally in the G1400. Figure 9 shows investment in R&D as a proportion of profits for firms in the G1400. Of the 15 sectors making the biggest global investments in R&D, only the leisure goods sector invested an amount equivalent to its operating profit in R&D. Again, this may reflect the differences in composition of the two lists. Figure 9: R&D expenditure as a proportion of operating profits across UK850 and G1400 (2007) Commentary & Analysis The 2008 R&D Scoreboard 21

24 5 Key sectoral trends in R&D a comparison of UK and global performance The pharmaceuticals & biotechnology, automobiles & parts and software & computer services sectors in the UK850 have improved their profit margins significantly over the last four years (see Figure 10). The automobiles & parts sector was loss-making in 2003, but increased its operating profit as a proportion of its sales to 1.8% in 2007 (from -5.9%). It reduced its investment in R&D as a proportion of sales, however, over the same period to 3.8% in Although investment in R&D declined slightly as a proportion of sales in the pharmaceuticals & biotechnology sector, the sector remained one of the most profitable sectors. In contrast, the companies in the fixed line communications sector increased their investment in R&D as a proportion of sales. On average, levels of investment in R&D and profitability as a proportion of sales were little change for companies in the aerospace & defence sector. Figure 10: R&D as a proportion of sales and operating profit for UK850 (2003 and 2007) 30% 25% Pharmaceuticals & biotechnology (2007) 20% Operating profit as % sales 15% 10% 5% Fixed line telecommunications (2003) Automobiles & parts (2007) Fixed line telecommunications (2007) Software & computer services (2007) Aerospace & defence (2007) Aerospace & defence (2003) Pharmaceuticals & biotechnology (2003) 0% Software & computer services (2003) -5% Automobiles & parts (2003) -10% 0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20% R&D as % sales 22 The 2008 R&D Scoreboard Commentary & Analysis

25 Sector summaries 6 Sector Summaries Aerospace & Defence The aerospace & defence sector was the second largest contributor to R&D in the UK850 and the seventh largest in the G1400 in Globally, the largest R&D investor in the aerospace & defence sector was EADS which ranked thirtieth amongst the G1400. Rolls-Royce and Airbus were the two largest investors in R&D in the UK850: they ranked seventh and eight respectively and together spent 64% of the sector total, and 4% of the UK850 spend. 6 One more aerospace & defence company entered the UK850 bringing the total to 25. Investment in R&D by foreign owned companies in the UK850 increased. R&D in the aerospace & defence continues to grow more quickly than sales amongst the largest investors. Automobiles & Parts The automobiles & parts sector was the fourth largest contributor to R&D in both the UK850 and the G1400 in Eight of the top 25 R&D investors globally are automobiles & parts companies. In contrast, only three UK companies are amongst the 25 leading UK investors in R&D. Foreign companies dominate R&D spend in the UK automobiles & parts sector: they spent 92% of the sector total, and over 5% of UK850 spend. Seven more automobiles & parts companies entered the UK850 bringing the total to 30. R&D in the automobiles & parts continues to grow more quickly than sales amongst the largest investors. This has not been the case amongst the UK850. Commentary & Analysis The 2008 R&D Scoreboard 23

26 6 Sector Summaries Banks The banks sector was the sixth largest contributor to R&D in the UK850 and the 16th in the G1400 in None of the top 25 R&D investors globally is a bank. Three banks are, however, amongst the top 25 UK investors in the UK850: they dominate R&D spend in the UK banks sector accounting for 87% of the sector total, and 4% of UK850 spend. Only two other banks are part of the UK850 making five companies in total. R&D spending by banks continues to grow more quickly than sales amongst the largest investors. Fixed Line & Mobile Telecommunications The fixed line and mobile communications sectors were the fifth and 12th largest contributors respectively to R&D in the UK850 in Three firms BT (ranked 3rd ), Vodafone (ranked 14th) and Telefonica O2 (ranked 24th) - were amongst the top 25 R&D investors within the UK850. These three companies dominate R&D spend in the UK fixed line and mobile communications sectors: they spent 95% of the sector total, and 7% of the UK850 spend. R&D in the fixed line and mobile communications sectors continues to grow more quickly than sales amongst the largest investors. 24 The 2008 R&D Scoreboard Commentary & Analysis

27 Pharmaceuticals & Biotechnology The pharmaceuticals & biotechnology sector was the largest contributor to R&D in both the UK850 and the G1400 in Eight of the top 25 R&D investors globally are pharmaceuticals companies: they include two UK firms, GlaxoSmithKline and Astra Zeneca. GlaxoSmithKline and AstraZeneca dominate R&D spend in the UK pharmaceuticals sector: they spent (89% of the sector total, and 37% of the UK850 spend). Sixteen more pharmaceuticals & biotechnology companies entered the UK850 bringing the total to 130. R&D in the pharmaceuticals & biotechnology industry continues to grow more quickly than sales amongst the largest investors. Software & Computer Services In 2007, the software & computer services sector was the third largest contributor to R&D in the UK850 and the fourth in the G1400. Two of the top 25 R&D investors globally are software & computer services companies: these include Microsoft, the world s largest investor. R&D spending by companies in the UK software & computer services sector remains relatively fragmented: the five largest companies in terms of R&D spent 36% of the sector total. Six more software & computer services companies entered the UK850 bringing the total to 131, more than any other sector. R&D in the software & computer services continues to grow more quickly than sales amongst the largest investors. Commentary & Analysis The 2008 R&D Scoreboard 25

28 7 The pattern of R&D across different categories of firm in the UK The pattern of R&D across different categories of firm in the UK 7 Introduction This section analyses the pattern of R&D expenditure across different categories of firms in the UK, and, where relevant, globally. It starts by summarising the recent pattern of investment in R&D and other key business performance characteristics by category of firm across the UK850 and examines changes since the previous Scorecard. It then looks at firms by the scale of their sales. It also compares listed and unlisted firms and UK-owned and foreign owned firms. The final part of the section examines the characteristics of the most R&D intensive businesses and identifies those firms in the UK850 which have increased and reduced their R&D investments by the most over the last 12 months. Summary Table 4 summarises the pattern of investment in R&D and other key business performance characteristics according to ownership across the UK850. It also shows the comparable statistics for the G1400 firms. The key points to note are that: the UK s 88 biggest R&D investors which also form part of the G1400 largest R&D spenders worldwide conducted two thirds of the UK850 s R&D; the UK88 grew their R&D by 10% over the previous year which was similar to their global peers; and the proportion of foreign owned UK firms in the G1400 has remained similar with the previous Scoreboard. 26 The 2008 R&D Scoreboard Commentary & Analysis

29 Table 4: Investment in R&D and other measures of business performance across UK850 and G1400 (2007) Number of companies R&D ( m) Change in R&D over previous year (%) Change in sales over previous year (%) Operating profit as percentage of sales (%) UK-owned Listed , % 8.4% 16.7% Unlisted 169 1, % 35.3% 5.3% Foreign-owned 324 5, % 4.0% 7.8% Total UK , % 9.5% 14.3% UK companies within G , % 9.8% 16.7% Total G1400 1, , % 8.2% 11.9% Differences in R&D between firms by value of sales Table 5 shows the composition of firms in both the UK850 and G1400 broken down by the value of their sales. Companies with sales of less than 50 million were the largest proportion of the UK850 in 2007 (40%) followed by companies with sales between 50 million and 500 million (35%). 214 companies had sales over 500 million, of which 48 achieved sales of over 5 billion. In contrast, and as expected, Table 5 also shows that firms in the G1400 have larger sales than those in the UK850. Nearly three quarters of the G1400 firms had sales in excess of 500 million. Proportionately more of the 88 UK firms in the G1400 had sales over 5 billion: 31% of UK firms had sales in excess of 5 billion compared to 24% of the other 1,312 G1400 firms. On the other hand, 11% of UK firms had sales below 50 million as compared with just 4% of G1400 firms. Table 5: Distribution of firms by firms value of sales in UK850 and G1400 (2007) Value of Sales Number UK850 % of total Number % of total G1400 Non-UK firms % of total UK firms More than 5 billion 48 6% % % 27 31% Between 500 million and 5 billion % % % 29 33% Between 50 million and 500 million % % % 22 25% Less than 50 million % 59 4% 49 4% 10 11% % of total Total UK % 1, % 1, % % Commentary & Analysis The 2008 R&D Scoreboard 27

30 7 The pattern of R&D across different categories of firm in the UK Table 6 analyses investment in R&D as a proportion of sales for firms of different sizes in both the UK850 and the G1400. It shows that: smaller firms in the UK (as measured by their sales) invested significantly more in R&D than their larger peers in the UK: for example firms with sales less than 50 million invested 29% of their sales in R&D whereas those with sales in excess of 5 billion invested 1%; and UK firms invested significantly less in R&D (as a proportion of sales) than their counterparts globally: for example, the largest companies globally outside the UK (with sales of more than 5 billion) invested 3% of their sales in R&D compared with 1% for those with similar sales from the UK. Both these results partly reflect the mix of firms in the UK850 and G1400. First, smaller firms in the UK850 tend to be more R&Dintensive, being concentrated in high-tech sectors, while larger firms include banks and oil & gas companies, for example, with high absolute R&D numbers that represent a very small proportion of their total sales. Second, as previously noted, the UK s sectoral mix of R&D businesses is quite different to that of other countries. Previous Scoreboards have shown how this accounts for the UK firms lower R&D intensity. Table 6: R&D and sales by firms value of sales (2007) Sales UK850 Number of companies R&D ( m) Sales ( m) R&D as % of sales More than 5 billion 48 12, ,946 1% Between 500 million and 5 billion 166 5, ,708 2% Between 50 million and 500 million 298 3,171 59,219 5% Less than 50 million 338 1,421 4,904 29% G1400 (excluding 88 UK firms) More than 5 billion ,505 5,992,567 3% Between 500 million and 5 billion ,141 1,266,011 5% Between 50 million and 500 million ,277 76,656 15% Less than 50 million 49 1, % 28 The 2008 R&D Scoreboard Commentary & Analysis

31 Differences in R&D between different types of ownership Listed and unlisted companies Table 7 compares the characteristics of listed firms in the UK850 with those of unlisted UK companies including foreign-owned firms. The listed companies increased their investment in R&D by 10% compared with the previous year, whereas investment in R&D by the unlisted companies decreased by nearly 3%. Operating profits expressed as a proportion of sales improved for listed UK-owned companies for the second year in a row from 15.8% in last year s Scoreboard to 16.5% this year. For unlisted UK-owned companies operating profits expressed as a proportion of sales also improved. Table 7: Investment in R&D and other measures of business performance across listed and unlisted firms in the UK850 (2007) Ownership status Number of companies R&D ( m) Change in R&D previous year (%) Change in sales over previous year (%) Operating profit as percentage of sales (%) Listed , % 8.5% 16.5% Unlisted 487 6, % 12.9% 7.0% UK- and foreign-owned firms Slightly less than three quarters of the investment in R&D in 2007 by the UK850 (74%) was made by companies which are UK-owned; slightly more than one quarter (26%) was invested by foreign-owned firms. The proportion of foreign-owned companies has followed the upward direction, with 38% of companies under foreign ownership compared with 35% in last year s Scoreboard. Over the last year, UK-owned firms increased their investment in R&D whereas foreign-owned firms investment in R&D declined, albeit marginally. UK-owned firms also achieved higher levels of profitability and sales growth was faster than foreign-owned firms. When expressed as a proportion of their operating profits, foreignowned companies in the UK850, however, spent more on R&D (34%) than UK listed companies, which spent 9% of their operating profits on R&D. Furthermore, foreign-owned companies spent less than the equivalent of 3% of their sales on R&D whilst UK owned companies spent less than 1.5% of their sales revenue on R&D. Commentary & Analysis The 2008 R&D Scoreboard 29

32 7 The pattern of R&D across different categories of firm in the UK R&D intensity of firms Figure 11 shows R&D expenditure as a proportion of sales for three categories of firm in the UK850. On average, foreign owned firms spent a higher proportion of the value of their sales on R&D (2.6%) than either listed or unlisted companies. Figure 11: R&D expenditure as a proportion of sales by ownership of firms in the UK850 It is also relevant to compare R&D as a proportion of sales for companies of a similar size from the G1400 which are owned in the US, UK and other parts of the EU. Broadly speaking the pattern is similar to the previous Scoreboard: proportionately more US companies spent over 10% of the value of their sales on R&D than their counterparts and more UK-owned companies with the lowest ratio of R&D investment to sales. What has changed since last year is that there are proportionately more UK firms, as compared with the US, that spent over 20% of the value of their sales on R&D. This shows that UK companies are continuing to operate in sectors characterised by high R&D intensity. At the other end of the scale, there are proportionately fewer UK firms that spent between 2-4% of the value of their sales on R&D whereas, compared last year, there are proportionately more US firms that spent over between 2-4% of the value of their sales on R&D. The US continues to have a more consistent pattern whilst the UK appears to have a bimodal pattern, with the peaks at either end. 30 The 2008 R&D Scoreboard Commentary & Analysis

33 Table 8 lists the listed companies with the highest ratio of investment in R&D to sales in Companies from the pharmaceuticals and biotechnology sector dominate. However, Solexa a healthcare equipment and services firm came top of the list with a ratio of 1768%. Table 8: Companies with the highest ratio of R&D expenditure to sales (2007) 2 Company R&D as a proportion of sales (%) R&D ( m) Growth in R&D over last year (%) Sector Solexa (now Illumina Cambridge)*# 1, Health care equipment & services Ark Therapeutics 1, Pharmaceuticals & biotechnology CeNeS Pharmaceuticals (now part of Paion, Germany) 1, Pharmaceuticals & biotechnology Paradigm Therapeutics (now Takeda Cambridge) (now part of Takeda Pharmaceutical, Japan)*# Pharmaceuticals & biotechnology Lombard Medical Technologies Health care equipment & services MediGene*# Pharmaceuticals & biotechnology ClearSpeed Technology Technology hardware & equipment Celtic Pharma Development*# Pharmaceuticals & biotechnology Sosei R&D*# Pharmaceuticals & biotechnology Oxford Biomedica Pharmaceuticals & biotechnology TIBCO Software*# Software & computer services Osmetech Pharmaceuticals & biotechnology Antonov Automobiles & parts Summit Pharmaceuticals & biotechnology Acambis Pharmaceuticals & biotechnology * - foreign owned firm # - accounts not prepared using IFRS 2 This table excludes firms with sales of less than 250,000. Commentary & Analysis The 2008 R&D Scoreboard 31

34 7 The pattern of R&D across different categories of firm in the UK The biggest changes in the UK Table 9 lists the 20 companies in the UK800 which have increased their investment in R&D by the most since the previous R&D Scoreboard. The biggest increase over the last year is that of AstraZeneca which increased its R&D investment by 117% (an increase of 581 million) and is now the second largest UK corporate investor in R&D. There were notable increases in R&D spend in oil & gas production where Royal Dutch Shell and BP increased their investment by 159 million and 86 million respectively. Other significant increases in R&D investment included: BT, which increased its spend by 133 million, reflecting a continuation of the trend noted in last year s Scoreboard; Shire, Bristol-Myers Squibb and Eisai Europe which reflected the strong growth across the pharmaceuticals and biotechnology sector; and Royal Bank of Scotland which increased its investment in R&D by nearly 100 million. Table 9: Biggest increases in R&D expenditure in the UK850 (2007) Company Sector Increase in R&D ( m) AstraZeneca Pharmaceuticals & biotechnology 581 Royal Dutch Shell Oil & gas producers 159 BT Fixed line telecommunications 133 Shire Pharmaceuticals & biotechnology 109 Royal Bank of Scotland Banks 99 BP Oil & gas producers 86 BHP Billiton Mining 47 Ineos# Chemicals 43 Rolls-Royce Aerospace & defence 43 Old Mutual Life insurance 34 Bristol-Myers Squibb*# Pharmaceuticals & biotechnology 34 Ford Motor*# Automobiles & parts 33 Eisai Europe*# Pharmaceuticals & biotechnology 31 Rio Tinto Mining 27 Nokia*# Technology hardware & equipment The 2008 R&D Scoreboard Commentary & Analysis

35 Table 9: Biggest increases in R&D expenditure in the UK850 (2007) (continued) Company Sector Increase in R&D ( m) Bentley Motors*# Automobiles & parts 26 Alliance & Leicester Banks 25 Symbian# Software & computer services 24 Barclays Banks 23 British Sky Broadcasting Media 23 * - foreign owned firm # - accounts not prepared using IFRS In contrast, Table 10 lists the 20 firms in the UK which reduced their investment in R&D by the largest absolute amount over the last year. GlaxoSmithKline recorded a drop in its investment in R&D of 211 million yet remained the biggest investor in R&D in the UK in Other companies in the pharmaceuticals sector also reduced their R&D investment significantly, for example Pfizer, Merck Sharp & Dohme and Aventis. This contrasts with AstraZeneca which recorded the biggest increase in R&D investment of 581 million. Table 10: Biggest decreases in R&D expenditure in the UK850 (2007) Company Sector Decrease in R&D ( m) GlaxoSmithKline Pharmaceuticals & biotechnology 211 SELEX Sensors and Airborne Systems Electronic & electrical equipment 118 Pfizer*# Pharmaceuticals & biotechnology 112 Smiths General industrials 91 Merck Sharp & Dohme*# Pharmaceuticals & biotechnology 61 Imperial Chemical Industries* Chemicals 59 Land Rover (now Ford LRH)*# Automobiles & parts 50 Centrica Gas, water & multiutilities 49 Airbus*# Aerospace & defence 48 Royal & Sun Alliance (now RSA Insurance) Nonlife insurance 43 Commentary & Analysis The 2008 R&D Scoreboard 33

36 8 The pattern of R&D across different categories of firm in the UK Table 10: Biggest decreases in R&D expenditure in the UK850 (2007) (continued) Company Sector Decrease in R&D ( m) Fujitsu Services* Software & computer services 29 Reed Elsevier Media 28 Unilever Food producers 28 Aventis (Dagenham)*# Pharmaceuticals & biotechnology 24 LogicaCMG (now Logica) Software & computer services 19 Goodrich Controls*# Aerospace & defence 17 Philips Electronics*# Electronic & electrical equipment 17 Misys Software & computer services 17 British Nuclear Fuels# Electricity 15 Agilent Technologies*# Electronic & electrical equipment 15 * - foreign owned firm # - accounts not prepared using IFRS 34 The 2008 R&D Scoreboard Commentary & Analysis

37 Scope, definitions and limitations of the R&D Scoreboard Appendix A Scope, definitions and limitations of the R&D Scoreboard This Appendix explains the scope of the R&D Scoreboard, the definitions which underpin it and the limitations that result from the scope and definitions. Scope of the R&D Scoreboard The UK850 and G1400 have been prepared on the basis of annual reports and consolidated accounts received by Company Reporting Ltd up to and including 28th July Annual reports which have a year-end older than 30 months from this cut-off date or a publication date older than 24 months from cut-off date are excluded. For companies that have prepared an annual report and accounts for a period not equal to 12 months, the figures in the R&D Scoreboard have been annualised to reflect a 12 month period. To ensure figures are not misrepresented, annual report and accounts for a period less than four months are not annualised and the companies are excluded from the Scoreboard. Appendix A For the UK850, the accounts used are the consolidated group accounts of the ultimate UK parent. Companies which are subsidiaries of other UK companies are not ranked separately, except for: some significant foreign owned companies that take advantage of the EC 7th Directive non-consolidation provision; companies that disclose R&D costs where the ultimate consolidating parent does not; and the ultimate UK parent does not produce consolidated accounts or has never published accounts. For the G1400, the accounts used are the consolidated group accounts of the ultimate parent company. Companies which are subsidiaries of any other company are not ranked separately. These bases seek to maximise completeness while at the same time minimising double counting. Commentary & Analysis The 2008 R&D Scoreboard 35

38 Appendix A Scope, definitions and limitations of the R&D Scoreboard The R&D investment included in the Scoreboard is the cash investment which is funded by the companies themselves. It excludes R&D undertaken under contract for customers such as governments or other companies. It also excludes, where possible, the companies share of any associated company or joint venture R&D investment. However, joint venture companies that publish accounts and disclose R&D are included. Where part or all of R&D costs have been capitalised, to calculate the cash investment the additions to the appropriate intangible assets are included in the Scoreboard as R&D investment and any amortisation eliminated. For some foreign-owned UK companies, R&D investment is incurred within the UK but funded by the parent or another group company. In such cases, where the R&D is noted in the UK company report, the scope of R&D investment included in the UK850 is broadened to include the activity taking place in the UK but funded from overseas. Data on previous years R&D investment are taken from the appropriate year s annual report and accounts. R&D investment for previous years does not take into account restated figures. Where a significant event, such as a merger or acquisition has taken place, comparative figures from the latest accounts are taken to give a more accurate reflection of company performance. In the case of mergers and acquisitions earlier year figures are taken in respect of the larger of the two constituent companies. Where a company has reported under IFRS and disclosed a R&D figure for the first time, comparative figures are taken to give a R&D figure for the previous year and a one year growth rate. Where a company previously reported under its domestic GAAP and has disclosed under IFRS for the first time in the current year, and where there is a material difference in R&D between the two years, comparative figures have been entered to more accurately reflect the R&D spend for each year. Where there exists an information discontinuity between the current year and previous year s comparative figure R&D disclosure, a n/a has been entered for the previous year s R&D. 36 The 2008 R&D Scoreboard Commentary & Analysis

39 Definitions The R&D investment included in the Scoreboard, being that disclosed in the annual report and accounts, is subject to the accounting definitions of R&D. For UK GAAP, the definition is contained in Statement of Standard Accounting Practice (SSAP) 13 Accounting for research and development. For companies reporting under International Accounting Standards (IAS), the definition is contained in (IAS) 38 Intangible assets. Both of these definitions are based on the OECD Frascati manual. The R&D investment disclosed in some international companies accounts follows the US practice of including engineering costs relating to product improvement. Where these engineering costs have been disclosed separately, they have been excluded from the Scoreboard. However, the incidence of non-disclosure is uncertain and the impact of this practice is a possible overstatement of some overseas R&D investment figures in comparison with the UK. Both US and UK practice exclude technical service from the definition of R&D. Companies are assigned to the appropriate sectors of the Industry Classification Benchmark (ICB) as of the year-end date of their accounts. Each company s national stock exchange has been consulted to obtain an industry classification. Companies listed on stock exchanges which do not use the ICB and unlisted companies are allocated to an industry sector that best suits their business as described in their annual accounts. Companies are assigned to the country where they have chosen to incorporate the overall group with the exception of all FTSE 100 companies which are assigned to the UK for the purpose of the Scoreboard regardless of their country of incorporation. The listing status of all companies has been taken as at 28th July Sales - for banks, sales are defined as the Total (operating) income line from the profit & loss account and, for insurance companies, they are defined as Gross premiums written plus any banking income. Commentary & Analysis The 2008 R&D Scoreboard 37

40 Appendix A Scope, definitions and limitations of the R&D Scoreboard Operating profit (or loss) - profit (or loss) before taxation, less any Government grants, plus net interest paid (or minus net interest received), less gains (or plus losses) arising from the sale/disposal of businesses or fixed assets. Growth over last four years - current year R&D minus previous four year average over the previous four year average 3. R&D investment plus capital expenditure current year investment in R&D plus additions to tangible fixed assets. Employees - the consolidated average employees total, or year end employees if the average is not stated. Exchange rates - all foreign currency amounts have been converted to their Sterling equivalent using the UK sterling exchange rates ruling at 31st December This applies also to the historical comparative data. The market capitalisation figures in the R&D Scoreboard are the gross market capitalisation of each company as at 8th August The percentage change in market capitalisation is calculated from market capitalisation as at 3rd August Nationally owned a UK company which has a UK parent whose accounts could not be obtained. Sources The database from which the R&D Scoreboard is drawn is owned and maintained by Company Reporting Ltd. The database consists of information from the audited annual reports and accounts of UK and international companies. The UK850 companies are those which are identified by Company Reporting as having an R&D activity and which respond to a request for their annual accounts; there are no known omissions. 3 The growth over last four years is still calculated if a company has one year of historic data missing for whatever reason (e.g. current and three previous years). 38 The 2008 R&D Scoreboard Commentary & Analysis

41 In the case of the G1400, the Company Reporting database is supplemented by a feed service from Standard & Poor s Compustat Global Vantage database to identify potential new entrants to the ranking. The Amadeus Bureau van Dijk s Orbis database has also been used and recognised international stock exchanges are also monitored for potential new entrants. Limitations There are some limitations inherent in the approach used in preparing the data which underpin the R&D Scoreboard. The main limitation is the reliance on disclosure of R&D investment in published annual reports and accounts. A significant minority of companies with evidence of R&D activities disclose no figures for R&D investment. In some cases, the R&D investment is not material enough to warrant disclosure; in others (e.g. small companies), this is permitted by current accounting standards. Some significant European owned companies do not appear in the UK850 because they have taken advantage of certain accounting provisions which allow them to not prepare consolidated accounts if their results are reflected in the consolidated accounts of a parent company within another member country of the European Union. Where there are no meaningful figures at group level, the accounts of the major UK operating subsidiary are used if these disclose R&D. A few foreign-owned UK companies are known to have significant R&D investment but do not disclose this investment in their accounts and cannot, therefore, be included. Companies occasionally change the basis on which they calculate R&D and/or disclose it in their reports. For many diversified groups, the R&D investment disclosed in their accounts arises from only part of their activities, whereas sales, operating profit and market capitalisation are in respect of all their activities. Unless all such companies disclose additionally their R&D investment with the other information in segmental analyses, it is not possible to relate the R&D more closely to the results of the individual activities which give rise to it. The impact of this is that some statistics for these companies, e.g. R&D as a % of sales, will be understated for the divisions that are active in R&D. Commentary & Analysis The 2008 R&D Scoreboard 39

42 Appendix A Scope, definitions and limitations of the R&D Scoreboard The focus of the R&D Scoreboard on the R&D investment reported in company accounts means that the results are independent of the location of the R&D activity. The UK850 indicates the overall level of R&D funded by UK companies, not all of which is carried out in the UK. This approach enables inputs such as R&D investment and capital expenditure to be related to outputs such as sales, value added, profitability, productivity ratios and market capitalisation. The information in the R&D Scoreboard differs, however, from other information such as the Business Enterprise R&D (BERD) data generated by the Office for National Statistics (ONS). The ONS data focus on R&D activity within the UK, independent of the source of funding, and exclude R&D carried out by UK companies in other countries. The companies of some countries are less likely than others to disclose R&D investment, or to disclose it consistently. As a result, the G1400 cannot capture systematically all companies with R&D activity. There is evidence to suggest that the distribution of R&D activity is highly skewed towards larger companies. The Scoreboard captures the more significant R&D investing companies and, in any case, the minimum R&D needed for inclusion in the G1400 is over 18.5m. The R&D Scoreboard, therefore, allows reasonable comparisons to be made. Where companies have disclosed discontinued operations separately, the figures have been added to the continuing operations to give the aggregated figures for the fiscal year. Less detail may be given in the discontinued operations disclosure and this may lead to an underestimated R&D figure. 40 The 2008 R&D Scoreboard Commentary & Analysis

43 Summary of UK850 Appendix B Summary of UK850 Sector Number of firms R&D 2007 ( m) Change in R&D over last year (%) Aerospace & defence 25 1, % Financial services % Fixed line telecommunications 2 1, % Food & drug retailers % Food producers % Forestry & paper % Gas, water & multiutilities % General industrials % General retailers % Health care equipment & services % Household goods % Industrial engineering % Industrial metals % Industrial transportation % Leisure goods % Life insurance % Media % Mining % Mobile telecommunications % Automobiles & parts 30 1, % Nonlife insurance % Oil & gas producers % Oil equipment, services & distribution % Personal goods % Pharmaceuticals & biotechnology 130 7, % Software & computer services 131 1, % Support services % Technology hardware & equipment % Banks 5 1, % Tobacco % Appendix B Commentary & Analysis The 2008 R&D Scoreboard 41

44 Appendix B Summary of UK850 Sector Number of firms R&D 2007 ( m) Change in R&D over last year (%) Travel & leisure % Beverages % Chemicals % Construction & materials % Electricity % Electronic & electrical equipment % UK , % 42 The 2008 R&D Scoreboard Commentary & Analysis

45 Summary of G1400 Appendix C Summary of G1400 Sector Number of firms R&D 2007 ( m) Change in R&D over last year (%) Aerospace & defence 41 11, % Financial services % Fixed line telecommunications 16 5, % Food & drug retailers % Food producers 29 3, % Forestry & paper % Gas, water & multiutilities % General industrials 40 5, % General retailers 8 1, % Health care equipment & services 59 4, % Household goods 27 2, % Industrial engineering 89 8, % Industrial metals 25 1, % Industrial transportation % Leisure goods 29 10, % Life insurance % Media 13 1, % Mining % Mobile telecommunications % Automobiles & parts 84 46, % Nonlife insurance % Oil & gas producers 22 4, % Oil equipment, services & distribution 12 1, % Personal goods 18 1, % Pharmaceuticals & biotechnology , % Software & computer services , % Support services % Technology hardware & equipment , % Banks 17 1, % Tobacco % Appendix C Commentary & Analysis The 2008 R&D Scoreboard 43

46 Appendix C Summary of G1400 Sector Number of firms R&D 2007 ( m) Change in R&D over last year (%) Travel & leisure % Beverages % Chemicals 95 12, % Construction & materials 30 1, % Electricity 17 1, % Electronic & electrical equipment , % G1400 1, , % 44 The 2008 R&D Scoreboard Commentary & Analysis

47 The following organisations have kindly agreed to endorse the Scoreboard as a source of information for companies and their shareholders when considering the amount invested in R&D as part of the innovation process and business strategy