American Innovation: Alive and Well
Head of U.S. Equity Strategy
BofA Merrill Lynch Global Research
(Recorded on April 3, 2013)
Hi I’m Savita Subramanian, Head of U.S. Equity Strategy at Merrill Lynch. We believe that the U.S. innovation cycle is alive and well contrary to popular belief and a variety of data points suggest that this is the case. For example, the U.S. spend on research and development is higher than all of continental Europe combined and also exceeds China, South Korea, Taiwan and most of the other major Asian regions of the world. So as a signal that the U.S. is committed to pipeline growth and innovative products we think that R&D is a great metric and it still suggests that the U.S. is very committed and very focused on the innovation cycle within our country.
Another statistic we look at is patent applications and some skeptics argue that one worrisome statistic is the fact that applications for patents in China have recently eclipsed patent applications in the U.S. Now we think maybe a more important metric is the number of patents that are actually granted within each region and again the U.S. comes out on top: 23 percent of patents applied for in the U.S. have been granted relative to China’s 17 percent.
Another measure of how committed a region is to its own innovation prospects is the amount of venture capital that resides within its borders and here we found that the U.S. captures about 75 percent of total global venture capital so again on this metric the U.S. appears to be in a very strong leadership position in terms of a culture of innovation.
Innovation Impacts Sector Growth
We think that the U.S. innovation theme has very broad-reaching impact for a variety of sectors. Now the obvious beneficiaries are probably technology and healthcare which are two sectors that tend to spend the largest percentage of sales on research and development and they tend to have the strongest innovation culture amongst all sectors of the market.
But we think that again this theme can actually affect other industries that you might not necessarily think of as key innovators. For example, within the retailers a lot of innovation amongst textile manufacturing has actually given certain companies 2 competitive advantages over others. So this is a theme that doesn’t necessarily apply to just one sector or another, but we found pockets within most sectors of the market that offer this unique innovative angle.
Helping Drive Shareholder Value
From an equity investor’s perspective we think that innovation is actually a very important factor to consider when investing in a company and to that end we looked at the performance of companies that spend on research versus those that don’t.
And we found that companies that are actually committed to research and committed to long term growth projects tend to outperform companies that don’t by on the margin a couple of percentage points a year so this is not an insignificant theme for the equity investor. In fact, we think that equity investors can be rewarded handsomely for finding companies that are on the leading edge of innovation.
Get an expert’s take on the future of innovation in America from Savita Subramanian, Head of U.S. Equity and Quantitative Strategy at BofA Merrill Lynch Global Research.