PAYBACK A $1 investment in chemical R&D increases that year's operating income by the following amounts: YEAR NET RETURNS 1 37.2¢ 2 43.9¢ 3 40.7¢ 4 31.6¢ 5–7 41.6¢ TOTAL $1.94

On average, every dollar invested in chemical R&D produces about $2 in income in a seven-year period, a finding one of the study's authors calls "incredible." In addition, company innovation is dependent on academic chemical research.

For the study, Baruch Lev, professor of accounting and finance at New York University, and David Aboody, assistant professor of accounting at the University of California, Los Angeles, examined annual, audited financial statements of 83 publicly traded chemical companies published over the 20-year period of 1980–99.

Their analysis shows a "robust increase" in the average R&D intensity (ratio of annual R&D expenditures to sales) from 2.47% in 1980 to 4.70% in 1999. However, its 1999 ratio pales in comparison with the average R&D intensity of pharmaceutical companies in 1999, 12.14%, and is modest compared with the 4.84% average for all U.S. companies with R&D operations. Conversely, the ratio of R&D investment to operating earnings is quite high for the chemical industry, 56.7% in 1999, which indicates a serious constraint on substantial increases in chemical R&D budgets.

But the returns are substantial. Each dollar a chemical company invests in research returns an average of 17% over seven years after accounting for taxes and inflation.

Richard M. Gross is Dow's corporate vice president of R&D and first vice chair of CCR. He sees the relatively short payback period on chemical R&D investments as showing that chemical R&D has a lot of immediate returns. That may be because the industry has in recent years become more focused on process improvements, line extensions, and product improvements rather than "blue sky" research.

That's an important change for an industry that has traditionally financed a very large fraction of its own research, including even very basic scientific work, points out Ashish Arora, a professor of economics and public policy at Carnegie Mellon University, a facilitator and moderator for the study team. Now that the chemical industry has become a "hyperglobal" high-tech industry "where the competition is really, really tough, the question," Arora says, "is, How is basic chemical research going to get financed?"

	GROSS

Part of the answer can be found in the statistical patent-based research undertaken by CHI Research, Haddon Heights, N.J., for the CCR study. CHI President Francis Narin says, "One very interesting finding was the strong link" between chemical patents and public science. Chemical technologies cite roughly six science references per patent, and a very high percentage of the citations are to papers by academic researchers receiving public funding.

Even more interesting, Narin says, is that "in the R&D flow there are very distinct, very local components." For example, he says, Dow researchers are three times as likely to cite work done at Michigan State University as they are work done at the University of California.

CCR has spent roughly $200,000 on the first phase of what Gross says they always knew would have to be a multiphase study. Their sole goal was and is "to fill in a gap in the knowledge base."

"One of the questions that always comes up," he says, "is, Do you think everybody should go out and increase their R&D budget? My answer is no. I don't think that is what the study tells everybody to do across the board, and that wasn't a goal of the study."

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