How to tell if a company has a high IQ

May 4, 2006 -- There are companies that, like people, are smarter than others. Literally. A business professor at Washington University in St. Louis has developed a way to measure a company's IQ based on how effective it is at innovating. Using data from SEC filings, a professor at the Olin School of Business, computed the IQs of all the publicly traded US firms that engaged in R&D.

Joe Angeles/WUSTL Photo

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"In essence, firms fall into one of two camps," says Anne Marie Knott, assistant professor of 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. In contrast, firms that are less smart don't find it useful to spend money doing their own R&D and therefore rely on that of other firms."

• R&D spending has a link to IQ

"Interestingly, firms that aren't smart with their own R&D seem to be better able to use the innovations of rivals. Knott said. "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 it the acquiring firm 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 says. "Instead, high IQ firms, those that are most productive with their own R&D spending, actually have 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 with respect to imitating."

"We have always known there were firms who were leaders and those who were imitators," Knott says. "What's new is why firms choose their particular strategies—their strategy is matched to their IQ. What is also new is the insight that advising firms to spend more so they can benefit from the R&D of others doesn't add up.

"Spending doesn't affect IQ. IQ affects spending," Knott said.

Editor's Note: Professor Knott will be available through the month of May for interviews. The best way to reach her will be via her e-mail address.