Staying Competitive In An Innovative Global Economy
Competitive R&D programs are necessary to be relevant in an innovative economy.
Key Takeaways
- Global investment into R&D has been growing by roughly 4% annually over the past decade, with $2.4 trillion projected in 2021.
- Understanding trends and performance in R&D requires metrics (R&D Intensity, Number Of Researchers, Triadic Patent Families) and perspectives beyond gross R&D spending.
- As technologies grow more complex R&D is getting harder to do well, and innovation within the R&D space itself becomes increasingly important.
In July 2021, Japan put the finishing touches on its Moonshot Research & Development program, whose aims include the “realization of a society in which human beings can be free from limitations of body, brain, space, and time.” Backed by a 100 billion yen ($910 million) investment, this program is a drop in the $2.4 trillion global research and development (R&D) bucket. It is one of many new and ambitious R&D programs across the globe, and it represents the growing trend towards competitive innovation.
Global investment into R&D has risen by roughly 4% every year since the Great Recession in 2009. Businesses, governments, academic institutions, and nonprofits are all increasing R&D budgets. The trend is not isolated to any region, and global R&D investment now makes up more than 2% of global GDP. While different entities have different motivations, strategies, and goals, the trend is clear: competitive R&D programs are necessary to be competitive in an innovative economy.
Measuring R&D:
The U.S. has long been the global leader in gross R&D spending, defined by the OECD as the “total expenditure (current and capital) on R&D carried out by all resident companies, research institutes, university and government laboratories, etc., in a country.” However, in 2021, China is projected to surpass the U.S. with approximately $621 billion spent on R&D compared to the U.S. $598 billion. Japan is in third place with approximately $182 billion in projected R&D spending.
However, gross R&D spending is not the only metric worth considering. The U.S. has an R&D intensity (R&D spending as a percentage of GDP) of 2.88%, demonstrating one of the highest relative focuses on innovation in the world. In comparison, China’s R&D intensity is 1.98% which puts China only slightly above the global average of 1.74%.
Similarly, although China has more total researchers than the U.S., it is one of the lowest ranking countries if measured in terms of researchers relative to the size of its workforce. The chart below shows these three metrics for the top 40 countries based on R&D spending. Arguably, the most innovative countries are the ones at the top right (Finland, Japan, South Korea, Denmark, etc.) which have less gross R&D spending, but far higher relative focus on R&D.
Another way to measure R&D is by looking at the number of Triadic Patent Families (TPFs) — patents that have been registered in multiple patent offices across the world and are thus indicative of especially valuable inventions — produced. The U.S., Japan, and the E.U. (as a whole) top this list with approximately 15,000 TPFs per year. China is quite low on this list with ~5,000 TPFs despite an over 500% increase in total TPFs since 2008.
Motivations Within R&D:
The difference in these metrics is somewhat due to differing motivations. Take China for example. In the past, China has relied on importing core technologies from other countries. Because of this, China’s R&D investment strategy is highly driven by a desire for technological independence. The result is that China’s R&D is heavily focused on improving existing technologies, with only 30% of engineering hours dedicated to studying new technologies.
In contrast, the U.S. worries more about falling behind than about catching up. Part of President Biden’s $2.3 trillion American Jobs Plan is a $325 billion R&D plan to, in the words of the President, “…boost America’s innovative edge in markets where global leadership is up for grabs — markets like battery technology, biotechnology, computer chips, clean energy, the competition with China in particular.”
Japan’s motivations for R&D spending are slightly different. Disrupted heavily by the COVID-19 pandemic, Japan seeks economic recovery while simultaneously pursuing ambitious goals in carbon-neutrality, and improving digital infrastructure specifically. Similarly, the pandemic has influenced R&D spending in the EU, prompting the creation of a new EU-run biomedical research agency.
Staying Competitive:
These examples demonstrate the importance of R&D for countries to stay competitive. However, innovation cannot be won by simply throwing more money at it. R&D spending is growing because R&D is getting harder to do well. As technologies evolve, products become more complex, competition increases, consumer trends change, and R&D must rush to keep up.
Innovation complicates the interdependencies between products, systems, hardware, software, and other components, and makes it incredibly difficult to create usable end products. Tax credits, increased investment, and national R&D incentives will be ineffectual if the organizations that perform the research and develop the products continue to rely on legacy systems and strategies. To keep up with the dynamism of the current global environment, and to fully capitalize on R&D investment, innovation to the R&D space itself is necessary.
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