What does Dentsply International, a midsized manufacturer of dental products in York, Penn., have in common with Kobe Steel, a Japanese metals producer? What qualities are shared by Cadbury Schweppes, the European candy and beverage company; Tata Motors, the up-and-coming Indian automaker; and Google, the superstar of Silicon Valley? What links Caterpillar, the leviathan of earthmoving equipment, with Apple, the nimble conjurer of the iPod Nano, and Adidas, the German purveyor of sportswear? What does Toyota have in common with Christian Dior?

The answer: All these companies spend less than their competitors on research and development, yet outpace their industries across a wide range of performance metrics. They are among the world’s “high-leverage innovators,” a select subset of the Booz Allen Hamilton Global Innovation 1000, our annual roster of companies that spend the most on research and development worldwide. As different as they are from one another, these 94 smart spenders have one thing in common. They get more bang for their R&D buck than their peers, even their highly innovative peers. And they have managed to do so consistently over a five-year period. They may not develop the highest number of new products or services, but they consistently reap the greatest financial reward from every dollar they invest in R&D.

Now in its second year, the Global Innovation 1000 study is the most comprehensive effort to date to assess the influence of R&D on corporate performance. Last year, our in-depth analysis — studying the 1,000 companies that reported the most spending on research and development around the world in 2005 — demonstrated that there is no simple relationship between the level of R&D spending and corporate performance. This year, the data reinforced that conclusion and extended it, with a new understanding of innovation practices and additional metrics (such as the number and quality of patents). Among the specific findings:

• Deep pockets can be dry wells. Analysis of the 2005 Global Innovation 1000 confirms the major finding from our initial study last year: Money simply cannot buy effective innovation. There are no significant statistical relationships between R&D spending and the primary measures of financial or corporate success: sales and earnings growth, gross and operating profitability, market capitalization growth, and total shareholder returns. Gross profits as a percentage of sales is the single performance variable with a statistical relationship to R&D spending.

• Less than 10 percent of companies are high-leverage innovators. Compared with others in their industries, only 94 of the companies in the Global Innovation 1000 produced significantly better performance per R&D dollar over a sustained period.

• Companies are getting better at squeezing benefits from R&D spending. R&D spending by the Global Innovation 1000 rose last year by more than $20 billion, but revenues also rose more.

• Bigger can be better, even if it doesn’t boost breakthroughs. Scale provides advantages to R&D spenders. For the largest 500 companies, ranked by revenue and indexed by industry, median R&D spending was only 3.5 percent of sales in 2005, compared with 7.6 percent for the 500 smallest firms.

• Patents generally don’t drive profits. Boosting R&D spending can increase the number of patents that a company controls, but there is no statistical relationship between the number or even the quality of patents and overall financial performance.

• Masters of the innovation value chain have an edge. The high-leverage innovators and the companies with best overall performance distinguish themselves not by the money they spend, but by the capabilities they demonstrate in ideation, project selection, development, or commercialization.

Conventional wisdom often seems to view R&D as a predictable black box that automatically translates today’s innovation investments into tomorrow’s profits, even if nobody quite understands how it works. The principal findings from our study — both this year and last year — may undermine some people’s faith in innovation as a financial savior; however, they comport with the real-world experience of most corporate decision makers, as well as with the lessons of business history. Innovation often does lead to higher performance, but the process isn’t automatic. Many companies’ R&D efforts are unfocused. Money is wasted “reinventing wheels” that others have already rolled out. Good ideas get stuck in developmental bottlenecks. And promising innovations never get to market because of flawed understanding of customers’ needs, and poor marketing and investment planning.

In this year’s study, we systematically set out to find which companies have been getting R&D spending right, and then to identify their common attributes. To do this, we analyzed financial data for the Global Innovation 1000 using seven performance screens — sales growth, gross margin percentage, gross profit growth, operating margin percentage, operating income growth, total shareholder returns, and market capitalization growth — from 2000 through 2005. We chose five years as an appropriate time horizon for measuring the effects of R&D expenditures.

Analysis of the performance screens revealed that 94 companies within the Global Innovation 1000 — our high-leverage innovators — consistently outperformed their peers over the five-year period, while spending less on R&D as a percentage of sales than their industry median.

How did they do it? There’s no silver bullet; we found examples of many different models and approaches. If these high achievers have one thing in common, it seems to be a focus on building multifunctional, company-wide capabilities that can provide them with sustainable competitive advantage. They design their innovation investment for the long run, and create superior growth and profitability over time.

Corporate executives contemplating their R&D budgets in light of our Global Innovation 1000 study may recall John Wanamaker’s famous quip about advertising. He knew that half the money he spent was wasted; he just didn’t know which half. R&D spending can seem equally mysterious.

To solve the riddle and achieve high-leverage innovation, senior managers need to understand the entire innovation value chain in their business and identify an integrated process. “The global economy places greater value on economies of speed, scope and skill rather than simply economies of scale,” Sun Microsystems CEO Jonathan Schwartz wrote recently in the Financial Times. “This means innovation must be achieved by different departments and business units within the same organization working in parallel rather than in isolation as they often do in large corporations. It also means looking outside your organization to partners, suppliers and customers for new and innovative ideas.”