For those of you who missed last week's news: The U.S. stock market had its worst week ever last week with the Dow Industrials dropping 18% or 1874 points. Federal Reserve Chairman Bernanke says the financial sector has further strained an already weak U.S. economy. And in a report released last Tuesday, the IMF says the world economy is entering a major downturn (the analysis was written before the latest round of stock drops and banking events). Governments around the world are shoring up their private banks. The Federal Reserve is considering buying shares in U.S. banks. Oh, and unrelated to these events, the Federal Government issued a Continuing Resolution (an attachment to the Banking Bailout Bill) that effectively freezes all government spending at FY2008 levels through March 2009.
So what effect do all of these financial events have on the practice of R&D? Most of them point to effects that are not short term. Banking weaknesses and economic downturns are not quickly turned around. The stock market is a volatile factor and could just as easily see major improvements or continuing declines for a variety of reasons, although it's highly unlikely that it will rise to its former high (just eight days ago) of nearly 11,000 anytime soon.
Governments around the world have uniformly acted to support their economies, banks, and each other. It's been a long time since we've seen them act so much in harmony with each other. No one has been pointing fingers at each other, or the U.S. That's been encouraging. Even the Presidential candidates have been relatively quiet about what to do to fix our financial predicament. A lot of that is due to the facts that no one has any real clue as to what will fix the situation. Everyone is just throwing money at it and hoping that it will stabilize. But they're throwing tomorrow's dollars at it, not realizing what the real downstream costs of the fix will be. And they're likely to be gigantic.
So again, what effect do all of these financial events have on the practice of R&D? It's difficult to say, but borrowing for R&D investments is likely to be limited. And creating a plethora of new products in a weakening economy is not likely to create enough new revenue to justify large investments. But what we learned in biz school was that in times of economic weakness, the stronger companies continue to invest in themselves so that when the economy does turn around (and it will turn around, that's what cycles are all about) the investing companies are in a much stronger competitive position than those that didn't invest. Those are strong words to swallow for companies, like Ford and General Motors, who see their sales and stocks in effective free-fall.
R&D investments for the next 12 months are likely to be more strategic than they've been in many years. Some will hold onto or strengthen their core technologies. Some will look to combine or integrate technologies. Some will look to merge or acquire (although acquisitions are likely to be substantially down due to the banking failures). And still others (those with cash flow issues) will just retrench and try to cut their losses-it's difficult to invest in R&D in the middle of a downsizing.
A post-script: Battelle and we are in the middle of creating our annual 2009 R&D Funding Forecast. We have stacks and stacks of data, but I'd personally be very interested in getting your opinion on what will occur in the R&D environment over the next 12 months. Our report will be published in the December issue of R&D Magazine.
