Chinese search engine conglomerate Baidu Inc. leads the pack in a new ranking of the 50 most innovative companies in the world.
The RQ50 ranking is based on the research quotient (RQ), developed by Anne Marie Knott, PhD, professor of strategy at Washington University in St. Louis’ Olin Business School.
RQ, which was featured in the May 2012 Harvard Business Review article, “The Trillion Dollar R&D Fix,” is a measure of research-and-development (R&D) productivity linking R&D spending to firm growth and market value.
“RQ is the missing link explaining Goldman Sachs’ correlation between R&D spending and stock returns in their report ‘The Search for Creative Destruction.’ It’s not that spending more on R&D generates higher returns, it’s that firms with high RQ have higher optimal R&D, as well as higher returns per R&D dollar,” Knott said.
One concern with the report, Knott said, is that readers may walk away with the impression that increasing R&D increases returns.
“This simply isn’t true,” she said. “For many of the pharmaceutical firms, R&D is above optimum levels. In those cases, profits and market value would be higher if they cut R&D. RQ tells you when that’s likely.”
“Firms are beginning to use RQ to gauge their R&D capability, and to establish their R&D budgets, which I’m really excited about,” Knott said. “This should restore R&D’s role as the engine of economic growth. One thing impeding that has been that R&D spending is an easy target under investor pressure for quarterly earnings. Cutting R&D increases profits immediately, but its benefits are uncertain as well in the future, so they get too heavily discounted.”
Knott is excited by the fact that historically, RQ50 portfolios substantially outperform the indexes.
“This should get investor attention,” she said. “This opportunity for abnormal returns arises because firms in the RQ50 often fly below investor radar. If you look at the list, you’ll notice these aren’t the firms that typically come to mind when folks draw up innovator lists. The only RQ50 firm to consistently appear in other rankings is Amazon, which ranks sixth.”
For a full list of the RQ50, visit amkanalytics.com/Pages/rq50.