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Business News/ Opinion / Amazon, Alphabet, Intel head list of world’s biggest R&D spenders
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Amazon, Alphabet, Intel head list of world’s biggest R&D spenders

In an age when companies are focused on cutting costs and meeting earnings targets, R&D spending at Amazon and Facebook was up 28% and 26% respectively

By spending more on R&D, Mark Zuckerberg is thinking big, and long-term—and it seems to be working out for him. Photo: ReutersPremium
By spending more on R&D, Mark Zuckerberg is thinking big, and long-term—and it seems to be working out for him. Photo: Reuters

Amazon.com and Facebook had great earnings reports this week. They also reported spending a lot of money on the future. Capital spending was up 35% at Amazon and 125% at Facebook in the first quarter compared with the same quarter last year.

Research and development (R&D) spending was up 28% at Amazon and 26% at Facebook. In an age when much of corporate America seems focused on buying back shares, cutting costs and meeting quarterly earnings targets, Jeff Bezos and Mark Zuckerberg are thinking big, and long-term—and it seems to be working out for them.

I wondered, though, whether the spending by these relatively young companies really amounts to much compared with spending by the rest of corporate America. That is, are Amazon and Facebook’s investments big enough to matter to the economy?

On capital spending—that is, purchases of land, buildings and machines—the answer is no, not really.

Big old-line companies still lead the way in this ranking (I screened all the companies on the Russell 1000 Index)—although Alphabet, Google’s parent, does make the top 15. Amazon comes in 37th place, Facebook 67th. But when looking at R&D—which measures spending on discovering new knowledge and developing new products, including the salaries and benefits of those doing the work—things are a lot different.

This time Amazon tops the list, and Facebook, which only went public four years ago, is not only in the top 15 but also appears poised to pass IBM soon. Also, the top 15 are all tech and pharmaceutical companies. A decade ago, there was still one big non-tech manufacturer on the list—Boeing—and pharma was much more prominent.

Note that today’s spending totals are about twice as big as those of 2006. That’s not just inflation—the Consumer Price Index is up only 18% over that period. Overall, corporate R&D spending in the US is higher than ever, as a percentage of gross domestic product, Matthew Philips and Peter Coy reported in Bloomberg Businessweek last year.

It’s worth highlighting that companies have a lot of leeway in deciding what to report as R&D. As the Financial Accounting Standards Board (FASB) concluded many years ago:

Differences among enterprises and among industries are so great that a detailed prescription of the activities and related costs includable in research and development, either for all companies or on an industry-by-industry basis, is not a realistic undertaking for the FASB.

Amazon seems to go for a pretty expansive definition, including what it calls “content costs." Still, I don’t get the sense that this skews the numbers all that much. And big R&D spending numbers have consequences. Last year, for example, my fellow Bloomberg View columnist Matthew Winkler showed that companies that invest more in R&D see faster growth in market capitalization. Meanwhile, research indicates that the overall economic gains from R&D spending substantially exceed what companies themselves reap from it.

Amazon and Facebook are spending a lot on R&D (as are Alphabet and a few other tech giants). That’s good news for more than just them. Bloomberg

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

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Published: 02 May 2016, 04:25 PM IST
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