Execs say innovation critical; assert tax credits, R&D grants from D.C. would spur innovation and growthNew York, 7 December, 2009 – A new Ernst & Young LLP Strategic Growth Markets survey of C-suite executives finds that growth companies see innovation as critical to their growth, but admit they are coming up short and would do more if they had additional help from Capitol Hill to support their innovation efforts.
The critical role of innovation – visible and invisible
According to the survey, launched at the recent Ernst & Young Strategic Growth Forum, over 80% of company leadership surveyed say that innovation is critical to staying competitive and increasing profitability.
Nearly all (96%) of the executives say they invested in some type of innovation-related activity but the innovation they described is not just focused on highly visible products and services; in fact, more is focused on less visible internal processes and procedures.
Specifically, more executives (57%) cite “productivity/process improvements” as the leading area where they are investing in innovation. “New product development” is the second most popular choice with 55%.
“Innovation comes in many shapes and sizes,” said Maria Pinelli, Ernst & Young LLP, Americas Director of Strategic Growth Markets. “It’s a telling sign that these growth company executives are actually devoting more of their innovation resources to internal productivity measures. Given the ongoing financial pressures coming out of the recession, the processes companies rely on simply have to work harder and be more effective.”
As one survey respondent states: “In today’s economy, innovations in process improvements are as important as the next big idea.”
The vast majority (73%) say they will finance their innovation-related activities through “revenue from ongoing operations.” Only 16% say they will consider going to the capital markets – bond or equity offering – to finance innovation.
How innovative are they and what’s holding them back?
And though they place enormous importance on innovation, only 47% see themselves as more innovative than their competition. Conversely, 17% admit that they are, in fact, less innovative than their competition.
What might be preventing companies from being more innovative? When asked about their barriers to innovation, the point most often cited by respondents (48%) is a “lack of appropriate personnel to execute innovation.” “Lack of a big idea” is also cited by 41% as a barrier.
Government support could spur innovation
The majority (60%) of company leaders surveyed believed that the current Administration in Washington is “not” supportive of corporate innovation. Similarly, 59% assert that “innovation initiatives within my company would be enhanced with additional support from the government.”
What type of support would they like? In order of preference:
1. New tax credits for innovation initiatives
2. Increased grants for R&D programs
3. Relaxation of regulatory framework for industry
4. Increased investment in education systems
Perhaps that’s why just 27% of company executives say they plan to increase R&D spending over the coming 12 month period compared to the prior 12 months.
“By looking at the momentum behind renewable energy initiatives, driven by tax credits, we can see the impact of government support,” said James Markham, Ernst & Young LLP, Tax Leader, Strategic Growth Markets. “Corporate leaders see strategic tax incentives as offering tremendous opportunities to keep themselves and the country competitive.”
Guarded optimism in the growth sector
As the economy rebounds, optimism is returning to the growth company sector – 65% of the executives surveyed say they are optimistic about achieving their expectations for company growth over the next two years.
Still, more than one-third (35%) say they are pessimistic about achieving expectations for company growth over the next two years.
Furthermore, only 43% expect revenue to increase over the next year - and at an average rate of 13%; and just 45% expect an increase in overall profitability.
Though nationwide unemployment appears to be leveling off, almost one-third (30%) of company leaders surveyed anticipate layoffs over the next twelve months.
“When you consider the fact that the biggest barrier to innovation cited was ‘lack of appropriate personnel to execute innovation,’ ongoing reductions in human capital spending can only hurt future innovation efforts,” Ms. Pinelli said.
The year of living…cautiously
Over the next twelve months, growth company executives are cautious about where and how they will invest in their company. More executives say they plan to decrease their total spending/investment (36%) than increase it (31%).
On technology spending, 36% plan to increase it over the next year while 24% say they expect decreased spending.
Perhaps consistent with the times, the area in which the least amount of reduction appears to be risk management, where just 17% of company executives say they will be decreasing spending.
Financing growth: to most, available but expensive; to some, no access to funding
While 74% of executives surveyed say they currently have sufficient access to growth capital, and the majority (58%) believe access to capital will improve significantly over the next 12 months, fully 42% say capital is too expensive at the moment.
Conversely, 29% of company leaders say their current lack of access to capital impedes their ability to grow.
“There are a number of factors that growth companies have relied upon to help them innovate their way to growth, but those factors have been under intense pressure,” Ms. Pinelli said. “Unfortunately, this pressure couldn’t come at a more difficult time. The squeeze in the capital markets and traditional bank lending has made it increasingly difficult to finance innovation. Combine that with reduced headcount, ongoing economic hardship and a perceived lack of government support to help drive innovation and it’s no wonder America’s growth company leaders admit that they are not as innovative as they could or should be.”
“But the drive to innovate is as much a process as it is a spirit, and in the end, it will not be denied,” Ms. Pinelli concluded. “Innovation will lead America’s great growth companies out of this economic slowdown as the capital markets continue to open up. These innovators, these entrepreneurs, provide ideas today that will be the economic engine of our future.”
The Ernst & Young Strategic Growth Markets Growth Company Leadership survey was executed in September 2009, among leaders from 100 companies with $50 million to $5 billion in total revenue in 2008. Companies in the survey were equally publicly traded and private and spread over a wide cross section of industries. Survey results were announced at the Ernst & Young Strategic Growth Forum 2009 on November 11.
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