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Science fiction writer Arthur C. Clarke died yesterday. He was 90 years old.

Readers will recall the movie: 2001: A Space Odyssey, which Clarke co-authored together with director Stanley Kubrick. 
I often quote Clarke, including his statement: “Truly advanced technology is indistinguishable from magic.”

In 1945, in one of his books, Clarke proposed the concept of communications satellites – satellites that would be in ‘geosynchronous orbits,’ keeping them in a fixed position relative to the ground. The world’s first such satellite was launched 29 years later, on Dec. 17, 1974!
Some science fiction writers write pure fantasy. But some, like Clarke, are visionaries who see the future and describe it vividly. Such authors, I believe, are must reading for innovators, if only to peek into the workings of superbly imaginative and flexible minds like that of Clarke.
Clarke was co-commentator, along with Walter Cronkite, on the first Apollo space flight – a brilliant, and uncharacteristic,  idea for the American TV network CBS.   

“…the tough get going,” goes the saying. Does this hold for innovators and R&D?  Apparently not.

According to the Financial Times (Monday March 17), America’s 10 leading technology companies are reining in their R&D spending in the face of the American and global economic slowdown. Last year, 2007, these companies spent $40 b. on R&D, out of $426 b. in revenues, or less than 10%. While revenues rose by some 9%, R&D spending grew only by 4%. Look for further restraint on R&D this year, as the dollar plunges and global markets become more uncertain. 

An exception among the ten was Google, which raised its R&D spending by 73% last year, to $16 b. That sum, however, is small compared to the R&D spending leader, HP, where over $100 b. was invested in R&D. 

Years ago, TIM took a group of its startup companies on a benchmarking visit to Boston. We went to Teradyne, leading supplier of semiconductor equipment. There were told that Teradyne maintained its R&D spending in the face of a drastic drop in revenues in the wake of the 2000/1 recession.

Why? Simple, we were told. Recessions are an ideal time for great companies to gain market share, by boosting its innovation efforts while others are cutting back on them. It worked. Teradyne today is stronger than ever.  
As we face a global downturn, companies would do well to maintain and perhaps even increase their R&D budgets. Especially when it appears that most R&D-intensive firms are doing the opposite. 

This is straight from science fiction.

The Masters of the Universe, Bear, Stearns, fifth largest investment bank in the United States, whose stock price once soared well above $100, is out of business. Last March 12, its stock was worth $63.50; by March 14, it had fallen by half, to $30. And yesterday March 16, it was announced that their arch-rival and competitor, J.P. Morgan-Chase, bought all Bear, Stearns shares for… $2 per share. Some $20 b. in paper wealth went up in smoke. Investors pulled their money out of Bear, Stearns so fast the Fed did not have enough time to reliquify the bank. Bankruptcy happened at the speed of light.
Innovation is to blame.

Creative financial engineers found unique innovative ways to combine bad mortgages (the euphemism is “sub-prime,” but that means bad) with good ones, mixing them in complex ways that disguised the high risk involved, and revealed only the relatively high return (rate of interest). Most of the banks and investors who bought these so-called “collateralized debt obligations” (packages of mortgages that became collateral for bond issues) neither fully understood them, nor understood the risks involved. As often happens, when investors fail to adequately measure, manage and understand risk, the risk chickens come home to roost. People failed to pay, as interest rates rose, and the house of cards built on this financial innovation collapsed.

Alan Greenspan says we are now having the worst financial crisis since WWII – basically, since 1929. At that time, people yanked their money from banks and banks went bankrupt. It is now happening again. And, alas, financial innovation is to blame.

Blog entries written by Prof. Shlomo Maital

Shlomo Maital
March 2008
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