SAN FRANCISCO, USA: Research and development spending in the technology sector, a critical component in an industry where innovation is king, should hold up well this year despite slumping sales and deep cost-cuts.

Technology corporations are choosing to slash spending on areas such as marketing or staff while keeping research expenditures fairly constant as a per centage of sales. Some have even bumped up spending, hoping to cash in once the U.S. economy emerges from its longest recession since the Great Depression.

While R&D spending at many large U.S. technology companies is down from a year ago, as a percentage of sales it is generally remaining in line, recent earnings reports show - a trend that analysts say is likely to continue.

For Intel Corp, Microsoft Corp, Oracle Corp, Texas Instruments and other tech heavyweights grappling with sliding revenue, R&D expense made up a larger percentage of sales than last year. At famed innovation houses Google Inc and Apple Inc - where sales are still rising - R&D spending in the latest quarter actually outpaced that growth.

Although "invest through the downturn" has become something of a platitude in the technology industry, it appears at least for now that IT companies are putting their dollars where their rhetoric is.

"The guys that have any kind of cash and war chest have actually put the pedal to the metal," said Eric Openshaw, U.S. technology leader for Deloitte LLP.

"From past recessions what the tech community has learned is that if you don't focus on the R&D and aren't diligent about product introduction, when the economy accelerates you get left behind."

A recent report by the Organization for Economic Cooperation and Development found that R&D spending by the largest global IT companies is falling, but at a much slower pace than sales. The report showed first-quarter 2009 revenue overall declined around 15 per cent year-over-year, while R&D spending fell 5 per cent.

Graham Vickery, the report's principal author, also noted that R&D spending has not declined quite as much as it did in the downturn of 2001-2002.

"They know they have to spend money on R&D if they're going to survive in the next round," he said.

Careful there

History shows how smart companies innovate in a downturn and emerge on the other side in a dominant market position. The most frequently cited example is Apple, which launched the category-defining iPod in the depths of the 2001 recession. The first IBM PC running Microsoft's DOS operating system was introduced in the downturn of the early 1980s.

To be sure, companies are allocating their R&D dollars much more carefully, focusing on products they can bring to market while reducing spending on pie-in-the-sky pet projects.

Hewlett-Packard, although it does not spend as much as IBM on R&D, says it has over the years shifted the way it allocates those dollars.

Shane Robison, HP's chief strategy and technology officer, said the company now spends about 70 per cent of its R&D budget on software, a more cost-effective avenue than hardware.

"Software R&D is typically a little less expensive than hardware R&D, so you can get a lot more bang for your buck," he said, noting that HP's margin profile is a prime concern when allocating research dollars.

Dell is also trying to focus more on software.

Within Dell's "existing R&D portfolio, we are shifting a lot of it to sort of the higher value-add areas," Chief Executive Michael Dell said at an analyst meeting last month.

Technology companies began shedding costs and jobs at the end of 2008, downsizing their operations to offset diminished demand. As sales plunged at chip, hardware and software companies, they hacked away at expenses to stay profitable.

But Gartner analyst Jim Tully estimates R&D cuts on average have been about one-tenth the size of revenue declines.

The downturn of 2001 was distinguished by massive overcapacity that companies knew would take years to burn off.

"It's really been a minor cut, certainly compared with the last big downturn in 2001, where we saw a significant cut," he said. "People felt like they could relax ... this time there's a greater realization that people will have to go for broke. When it does finish, there's going to be a scramble for market share."

Still, R&D spending is getting hurt at the entrepreneurial level, where startups are struggling to find funding.

Analysts say that while the product cycle over the next few years should not be imperiled as large companies continue to spend, a lack of adequate funding at the grass-roots level of innovation could be felt five years or more down the line.

A recent Deloitte survey of more than 700 venture capital partners found in general they are "decreasing their overall investing dollars, focusing on their best companies and increasing their allocation to later-stage investments."

"A huge number of smaller companies that VCs invest in are very R&D intensive, so the falloff in venture capital spending or investment is really hitting them very hard," said Charles King, an analyst with Pund-IT Research.

"The company size and market impact is fairly minimal but they're doing some very interesting and innovative work. Those guys are getting strangled."