The American Century Is Over

Some of the most important discoveries of the 20th century took place within the hallowed halls of one uniquely American institution: Bell Labs. You may remember it as the research and development arm of the formerly monolithic telephone company, but its reach was felt far beyond Plain Old Telephone Service. Just a few of the innovations it either created or heavily influenced include:

  • Transistors.
  • Laser beams.
  • Stereo recording.
  • Television / HDTV.
  • Solar cells.
  • Superconductivity.
  • Many of the Internet's enabling technologies.

But this once-proud all-American research and development brain trust is now owned by a French company -- Alcatel-Lucent (NYSE: ALU  ) .

Even among those still-American companies with strong R&D heritages, the trend is somewhat frightening. Take, for instance, this chart of R&D spending from pharmaceutical giant Pfizer (NYSE: PFE  ) :

FY 2006

FY 2005

FY 2004

FY 2003

FY 2002

FY 2001

R&D as a % of sales

15.3%

14.4%

14.6%

16.7%

16.1%

16.5%

R&D is the lifeblood of a pharmaceutical company. Without successful research, when the current crop of blockbuster drugs go off patent, the company's revenues and profitability will suffer significantly. Yet internal R&D has declined as a percentage of revenues, making future blockbusters much less likely to come from within the firm.

Instead, the new R&D model seems to include significant outsourcing and offshoring. Large American pharmaceutical companies now fund compounds that make it through early-stage trials at start-ups and foreign firms. In return, they get paid to provide marketing muscle following regulatory approval. You can see that dynamic in the relationship between the American Bristol-Myers Squibb (NYSE: BMY  ) and the French Sanofi-Aventis (NYSE: SNY  ) for the blood-clotting treatment Plavix.

So what?
The next world-changing innovation, the accompanying jobs it brings, and the future investment dollars it attracts will likely come from somewhere with an active and growing R&D program. A company can sacrifice R&D for short-term cash-flow gains, but in a competitive economy dependent on innovation, such a move usually comes at the expense of long-term prosperity.

In addition to the direct loss of future innovation, R&D cutbacks often create ripple effects throughout a company. When a business depends on its past strength to drive its growth and fend off new challenges, it tends to become inward-focused and rest on its laurels. You can see a classic example of that behavior in American automobile manufacturer Ford (NYSE: F  ) . The onetime innovator and industry leader owed its early dominance to having pioneered the assembly-line manufacturing that allowed it to cost-effectively mass-produce cars.

Yet the company ossified over time, becoming inflexible and inefficient. For instance, it took until about 1982 before Ford accepted the quality-control ideas of W. Edwards Deming, even though Deming had been revolutionizing Japanese industry with his teachings since the 1950s. More recently, Ford literally had decades to study, learn from, and emulate the operational successes of foreign "upstarts" such as Toyota (NYSE: TM  ) and Honda (NYSE: HMC  ) . Yet it wasn't until its most recent bout of significant financial trouble that Ford started really making the tough changes needed to assure that it has a chance to even survive into the future.

Profit from innovation
In a variety of industries throughout history, R&D and innovation have driven future profit growth. As more and more American companies continue to lose focus on the core driver of their future growth, it makes sense to look to the new sources of innovation for investment ideas. As more R&D takes place overseas, the technological advances and profits will follow.

That's precisely what's so exciting about Motley Fool Global Gains, the international investing service led by Fool senior analyst Bill Mann. Wherever in the world a leading company can be found, he'll be there, uncovering the next generation of innovators. You can join us today to see all of our stock recommendations, research, and resources. Not quite sure you're ready to commit your capital abroad without further investigation? Your free 30-day trial starts here.

Got a few extra minutes? Watch an amazing video showing just how influential Bell Labs was in pioneering the American 20th century. Its passing into French hands is as clear a signal as any that now is the time to go global in your portfolio.

Fool contributor Chuck Saletta is an electrical engineer who once aspired to work for Bell Labs. At the time of publication, he owned shares of Alcatel-Lucent. Pfizer is a Motley Fool Inside Value recommendation. The Fool has a disclosure policy.


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