Boosting Innovation

It is good to note that the Indian government is looking to boost R&D spend in the chemicals industry.

According to this report, agro chemical companies would be given an income tax exemption to the extent of 1.5 times their annual R&D expenditure. The benefit will be available to all locally done research by multinational companies. This scheme is currently available only to the pharmaceutical industry.

Indian chemical companies need to get serious on R&D and innovation to effectively compete globally.

There has been some debate on how much companies should expect from innovation. Mckinsey has undertaken research on whether R&D investments have translated into returns that would meet investors’ expectations.

The model used included R&D and capital expenditure costs, a molecule’s life cycle from launch to maturity, associated peak profitability and eventual erosion. On this basis, to achieve break-even return a business unit would need to see 5-9% of its sales derived from products introduced in the past five years for every 1% of its sales invested in product-related R&D. In process-related R&D, every 1% of sales invested should achieve a 2-5% reduction in total production costs.

The consultancy applied these criteria to 27 chemical businesses from Europe, North America and Asia. The research showed a rather disappointing return-on-investment performance: 60% of the chemical companies failed to generate positive returns from their R&D investments, while another 20% earned only a marginally positive return. Only 20% companies succeeded in generating a substantial return.

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