Some companies, like some people, are smarter than others. Really. Don't believe me? A business professor at Washington University in St. Louis, Missouri, has developed a method for measuring an organization's IQ based on the effectiveness at innovation.

"In essence, firms fall into one of two camps," says Anne Marie Knott, assistant professor of entrepreneurship and management at the Olin School of Business. "Smart firms" or "high IQ firms" produce more bang for their R&D buck and therefore spend money to do their own research and development. Less smart firms rely on other firms rather than spending their own money on R&D.

"Interestingly, firms that aren't smart with their own R&D seem to be better able to use the innovations of rivals," Knott says. "This result stands in contrast to a very popular theory in the management literature known as absorptive capacity. That theory holds that a firm's ability to absorb what other firms are doing is a function of how much R&D the acquiring firms actually does itself. The notion is that you can't understand cutting edge research unless you actually do some yourself.

"But in practice, that's not what appears to be happening," Knott continues. "Instead, high IQ firms, those that are most productive with their own R&D spending, actually have a lower ability to absorb the work of others. In other words, while they are 'high IQ' with respect to innovating, they are 'low IQ' with respect to imitating. Conversely firms that are 'low IQ' with respect to innovating tend to be 'high IQ' in respect to imitating."

The practical application of this finding is that we now know why firms choose particular strategies, either innovative or imitative. This knowledge can in turn help firms and investors make wiser decisions regarding R&D investment.

Written by Jay Hammond, Managing Editor, AccountingWEB.com
editor@accountingweb.com

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