R&D For The Little Guy

by Michael Fricke
Cover, Shay & Evans LLP

NEWFLASH: Caterpillar and the Ag Lab spend a lot of money on research and development every year!

Surprised? I thought not. As two anchors of the Peoria-area economy, everyone is well aware that Cat and the National Center for Agricultural Utilization Research (as the Ag Lab is formally known) pour millions of dollars into researching new technologies and developing innovative products and solutions to problems each year.

Conventional wisdom holds that large organizations such as major research universities, Fortune 100 corporations and agencies of the federal government are the only entities with the deep pockets and resources to carry on the vital R&D that keeps the U.S. economy humming. But as is often the case, conventional wisdom may not be as wise as you think. Increasingly, small businesses are ramping up their R&D efforts to gain a competitive edge in a marketplace where staying ahead of the technology curve can mean the life or death of your company.

Data from the National Science Foundation and the Census Bureau show that small companies (those with fewer than 500 employees) spend much more on R&D for every dollar of sales they receive than do large firms with more than 25,000 employees. What this means is that, in small companies across the country, the R&D budget is a larger piece of the overall pie than it is in the Fortune 100 companies. Small businesses employ scientists and engineers as a much higher percentage of their total workforce than large companies, and the gap is widening.

More and more, even large corporations are leaving it to the little guys to do the work of innovation, and then snatching up that innovation (for a handsome price) when it is ready. If you’ve ever heard of YouTube, Google Maps or Siri, then you’re familiar with small companies who developed transformative new products that were then bought by major corporations and became part of their products.

So what’s the implication for Peoria? For starters, we should make it a priority to invest in local small businesses and startups focused on the research and development of new products and technologies. You’ve heard the phrase before, but it’s true that the U.S. economy is becoming more of a “knowledge economy” than ever before. While industries like manufacturing and agriculture remain strong in the U.S., globalism has made cheap labor in Asia and cheap produce in Central and South America more easily accessible than ever before. Given the standard of living in the U.S., it is very difficult for us to compete on price, but thankfully, we are still outstanding when competing on innovation. That’s why you see the Apples of the world designing their revolutionary new products in the U.S., but building them in Asia.

Despite some negative publicity regarding non-U.S. manufacturing, this may actually be a good thing. The profits all flow back to the U.S., allowing the business to re-invest in more high-paying R&D jobs instead of lower-paying assembly-line jobs. Knowledge-economy businesses, while requiring greater up-front investment, employ more highly educated workers, pay better wages and pump more money back into the economy through their R&D efforts than many other industries. Thus, by supporting small, research-oriented businesses, we can attract more highly skilled workers who make more money and contribute more to the local economy.

But admonishing someone to support and invest in local research-focused companies is easier said than done, right? As I mentioned before, R&D businesses often require a significant amount of investment long before they realize any profit potential. Fostering these businesses takes commitment and a partnership among entrepreneurs, investors and other stakeholders, such as local government. Fortunately for us, our community is making great strides to improve these partnerships, and the future looks bright for R&D entrepreneurs. Entities like the Central Illinois Angels, The Heartland Partnership, Novus, SCORE and the City of Peoria all play important roles in fostering entrepreneurship and providing resources, financial and otherwise, to R&D-focused start-ups.

So what’s the ultimate takeaway? Technology companies are the future of American relevance on a global scale, and more often than we realize, innovation is happening in small companies—not just in the R&D departments of Fortune 100 corporations. As a business community, if we are to prosper, it is incumbent upon us to invest in these small businesses and implement the infrastructure to support them in their infancy. If we do, Peoria’s economy can flourish and continue impacting the global economy for many years to come. iBi