At its core, the business of chemistry is all about science—science aimed at driving innovations in products and technologies that help make our lives healthier, safer, more sustainable and more productive. Innovation can be found in all aspects of the chemical industry, from research and development to manufacturing to customer relationships. Innovative products and technologies made possible by the business of chemistry help to improve functionalities, reduce costs and increase productivity across a wide range of industries. Increasingly, innovation in the chemical industry is focused on products and technologies that support circularity and sustainability.
Innovation
Economic Elements of Chemistry — Last Updated Oct. 30, 2024
U.S. Chemical Industry R&D Spending
Chemical companies allocate, on average, 2-3% of their annual sales toward research and development (R&D), although some companies may allocate as much as 8-9%. And, unlike some other manufacturing industries that receive government funding for research, the business of chemistry in the U.S. typically funds its own R&D, according to the National Science Foundation.
$12.7
Billion invested in research and development
Measuring Innovation
The role of innovation is often viewed as critical to success. However, measuring innovation can be difficult. For industries and companies, many different measures of the innovation can be used such as annual R&D spending as a percent of total sales or number of patents filed. Measuring the percent share of revenues from new products and services is another metric that has found acceptance among stock analysts, academics and others.
Research & Development Spending
For companies, of interest are metrics that convey the performance of R&D innovation and compare it with other similar companies. In 2018, McKinsey & Company1 recommended two metrics linking inputs with outputs: (1) R&D spending/new product sales and (2) gross margin/new product sales. These metrics, which can be obtained from publicly available data, allow a company to determine if investment in its R&D portfolio convert to meaningful profit over time.
ACC collects data on the percent share of revenues from new products and services as part of its annual economic survey. Analysis of these data shows that specialty chemical companies devote a slightly higher share of revenues on new products and services compared to basic chemical companies.
15.9%
Share of Revenues from New Products
8.0
R&D-to-Product Conversion Ratio
1.7
New Products-to-Margin Conversion Ratio
Basic & Specialty Chemical Company Research & Development
Research and Development Activities
Once centered mainly in laboratories, modern R&D in the chemical industry extends beyond the development of new chemical compounds and products. R&D encompasses a wide range of activities, such as research on manufacturing improvements, novel uses of existing products, use of artificial intelligence and digitalization of processes. Investment in R&D is a commitment of resources in the present in exchange for an anticipated future stream of benefits. It involves allocating resources to people and, increasingly, digital technologies as opposed to simply increasing manufacturing output.
The Organisation for Economic Co-operation and Development (OECD) includes three types of activity in research and development: basic research, applied research and experimental development. Basic research involves work done in search of new knowledge based on principles of general validity, without regard to commercial objectives. Applied research, on the other hand, is when the investigation is planned with the intent of accomplishing a particular objective. Experimental development uses the findings from the research to generate new products or services.
R&D in Context
Among the nations of the world, the United States spends the most on R&D, followed closely by China (across all sectors), according to the OECD. However, the United States ranking in R&D intensity—measured as a percentage of GDP—is falling, as other countries, notably middle income countries like China and India—have ramped up R&D spending since the turn of the century.
According to the National Science Foundation, five business sectors: chemical manufacturing (including pharmaceuticals), computer and electronics, transportation equipment (including automotive and aerospace), professional services (including computer systems design) and information services (including software publishing) account for the majority of U.S. R&D spending.
Human and Financial Resources for R&D
1 Aase, G., Swaminathan, S. and Roth, E., 2018. Taking the measure of innovation. The McKinsey Quarterly