What is Return on Innovation Investment - Features and Benefits of Investing in Innovation

Introduction

Innovation is very important for companies aimed to increase their competitive edge in the market segment they operate. It is about novelties increasing the efficiency of processes and improving the quality of products/services. Innovation is essentially something new and not fully known. Injecting funds into the development of new products and services entails the risk of losing money.

How to improve the efficiency of investment in innovation? Let us explain to you what innovation investing (II) is, provide you with an understanding of what the return on innovation investment is, and offer advice on achieving maximum profit.

Essentials of II and what is return on Innovation Investment

In today’s world, transforming new ideas into finished products/services is difficult without investing to take a product from paper to the physical world. To increase demand for products and bring them to life, companies perform extensive market research and set up product development teams.

At each step, funds from a variety of sources are required, including private funding. While the funding provides a competitive advantage for companies, it also offers benefits in the form of returns on investment.

What is the Return on Innovation Investment

Also known as R2I or ROI2, it is an indicator of the funding effectiveness of a new product or service development project. ROI2 is the ratio of the difference of net profit from new products or services (NP) minus innovation costs (IC) to innovation costs (IC). There is a formula: ROI2=(NP-IC)/IC. The higher the value of ROI2, the higher the investment efficiency.

ROI2 shows how effectively the company converts the funds raised into products, services, and market research. ROI2 depends on a company’s ability to predict demand and make important strategic decisions. Current sales and originality of an idea do not directly affect ROI2.

Innovation in Investment Practices

Innovations cannot be implemented without external capital. Investors profit from a successfully implemented project. Novelty also gives companies a competitive edge in the marketplace. A range of activities are carried out to introduce them:

• Justify the need for market research and carrying out studies.

• Project development, construction work.

• Launch of product manufacturing.

• Maintaining the demand and sales level.

Each stage is implemented with public funding, private funds, charitable contributions, and loans. Putting funds into innovative projects helps to modernize the facility (company), increase profits and secure a leading position in the market.

Types and directions of II

Investments are divided into direct and indirect. With direct ones, you choose the target, get a controlling shareholding, and have the right to influence decision-making. Indirect ones do not give you the right to influence decision-making. In general, there are several areas of investment activity:

• Business management and labor process organization.

• Technological process improvement, development of new equipment to improve labor efficiency.

• Environment innovation, the creation of green technology.

• Improving product design and ergonomics.

• Improving marketing strategies and strategic business development.

• Development of new materials to reduce production costs.

• Development of new products and services.

Seed investments in new companies are the riskiest. On the other hand, internet start-ups, groundbreaking products, and robotics promise large returns.

Challenges of evaluating the return on Innovation Investment

Some innovations are doomed to fail in terms of ROI2. Spending on research, improving the user experience, training staff and increasing sales may not return funds in the short term. However, without innovation, a company may lose its market position. Accurately assessing the return on investment is difficult at the funding object level:

• ROI2 strongly depend on a company’s ability to develop new markets, create useful products and expand its customer base.

• To utilize the money raised, the company cut down on some processes and increase the productivity of marketers, salespeople, and other specialists.

• Management decisions are made by people, so the effectiveness of II is subject to the human factor.

In such a saturated market, only the companies able to correctly cost and optimize the process performance get a competitive edge. There are many additional factors to consider: proper employee branding, satisfaction, and external marketing.

Sound investment return management

From the need to illustrate value to building an innovative portfolio and developing new technologies, there are many reasons why today’s companies need to track ROI2 and adjust it in a timely manner by streamlining processes. One way to improve profitability is to establish accountability for decision-making, but it’s not an easy task.

If accountability is not in place, the following risks arise:

• Lost profits due to the inability to implement potentially breakthrough projects.

• A reduction in the company’s investment portfolio.

• Making misguided management decisions.

Innovation and risk management must go hand in hand. Companies without a deep understanding of their own efforts are doomed to fail in the highly competitive environment that today’s global marketplace is. To succeed, companies must maintain prudent risk-taking.

Achieving return on Innovation Investment

To make II worthwhile, the highest return has to be achieved. A certain measure must be taken to achieve the highest ROI2. So, there are factors to consider when making funding decisions:

• Realization of ambition and definition of value. Since there are many forms of novelty, firstly you must define the aims of the project. Also define standards for measuring the progress of the project, with all decisions based on real facts and well-thought-out plans.

• Key roles and responsibilities. Build and clearly follow a project roadmap, establish empowered decision-making bodies, ensure that the role of each actor is understood, encourage collaboration and ownership of the project’s success.

• Risk management. This includes the ability to correctly assess the different parts of the innovation portfolio, enhanced cooperation between different teams, well-established feedback and training, the introduction of clear and systematic methods, and the use of reliable data sources.

• Alignment of innovation and business strategies. Equip the team with everything it needs to maximize results, including effective software solutions for investment portfolio management. Make sure that every member of the team is motivated to do so.

• Evaluation standards for the project. Establish, implement and adhere evaluation indicators to each stage of project implementation.

The development and market launch of new products is a lengthy and very time-consuming process. When making investment decisions, you should be aware of all possible costs and benefits in order to eventually find a balance between them. A good strategy along with its flawless implementation and a good set of performance indicators are three important foundations for successful II.

F.A.Q.

What is Return on Innovation Investment?

It is an indicator that gives an indication of the efficiency with which investments in the development of new products or services are utilized.

What is innovation?

It is the process of translating new ideas into reality, i.e. the release of new products or services.

Is II viable?

Although this is a high-risk activity, the return on funding some projects can also be very high.

Can buying Bitcoins be considered a type of innovation investment?

No, because of the nature of digital tokens, this type of activity is called speculative investing.

How to increase the efficiency of investments?

Develop a viable strategy, ensure its effective implementation and use quality performance indicators.

How important is innovation in today’s world?

In fact, it has become the engine of progress as it brings new products and services to the market.