The global innovation revolution

Berkeley, CA – As countries around the world struggle to lay the foundations for stronger sustainable growth in the future, they would do well to focus on policies that encourage innovation. Empirical studies across time and countries confirm that innovation is the primary source of technological change and productivity growth. And investments in research and development, as well as in the scientific and engineering workforce on which they depend, are critical drivers of innovation and national competitiveness.

A new study by the National Science Board, the governing body of the National Science Foundation in the United States, examines trends in such investments for both individual countries and regions. These trends indicate that the global landscape for innovation changed significantly during the past decade.

That landscape is likely to change further as several Asian economies, particularly China and South Korea, increase their investments in R&D and scientific and engineering education to secure their place as significant hubs of innovation. At the same time, crushing debt burdens may compel the US, Europe and Japan to reduce their investments in these areas.

The US remains the global leader in R&D investment, spending an estimated $400bn in 2009 – a total boosted by President Barack Obama’s stimulus package, and higher than China, Japan and Germany combined. But, in terms of R&D spending as a share of GDP, the US ranked only eighth in 2009 (at 2.9 per cent of GDP). The US share remained above the OECD average, but this was mainly the result of national differences in the amount of R&D defence spending.

Indeed, defence accounted for 52 per cent of US R&D in 2009 and for more than 50 per cent during the past 25 years. The defence share of R&D in the European Union and Japan has been and remains markedly lower – less than ten per cent in the EU and less than five per cent in Japan in 2009 (no comparable data are available for China and South Korea). Over the next decade, sizeable cuts in defence spending as part of overall deficit reduction could mean a significant reduction in R&D investment in the US.

Between 1999 and 2009, global R&D spending grew at an average annual rate of seven per cent, accelerating to eight per cent during the past five years, despite the global recession. During the entire period, R&D spending grew significantly faster than global output, reflecting both increasing government support and a rising share of technology-intensive industries in global production and trade.

But these aggregate figures obscure differences among countries and regions. Over the decade, the US share of global R&D fell from 38 per cent to 31 per cent, the EU share fell from 27 per cent to 23 per cent, and Asia’s share rose from 24 per cent to 32 per cent. Within Asia, R&D spending in China grew at an astounding 20 per cent annual pace – twice the country’s GDP growth rate – and by 2009, China had surpassed Japan to become the world’s second-largest investor in R&D. Spending on R&D also grew rapidly – about ten per cent annually – in South Korea. By contrast, R&D spending grew by four per cent in Japan, five per cent in the US and roughly six per cent in Europe.

Throughout the world, the business sector remains both the predominant performer and the predominant funder of R&D investment. In 2009, business accounted for 75 per cent of R&D funding in Japan, 73 per cent in South Korea, 72 per cent in China, 67 per cent in Germany and 60 per cent in the US, whose companies are the largest R&D investors in terms of absolute purchasing power, spending more than twice as much as Japanese businesses. But business investment as a share of GDP has changed very little in the US over the past decade, while it has risen rapidly in many other countries, including China, Singapore, South Korea and Israel.

Global multinational companies are the largest business-sector R&D investors in the US and other countries. For example, multinational companies, whether headquartered in the US or elsewhere, accounted for about 84 per cent of private (non-bank) R&D investment in the US in 2009, about the same as a decade earlier. And US multinationals still locate about 84 per cent of their R&D activities in the US, often in innovation clusters around research universities. But this share has declined during the last decade, as US multinationals have shifted some of their R&D from the US and Europe to Asia in response to rapidly growing markets, ample scientific and engineering talent, and generous subsidies.

Global competition for multinational companies’ R&D activity, and for the local benefits that it brings, is likely to intensify in the future, with many countries already offering sizeable tax credits and extended tax holidays. The Asian economies have been particularly aggressive in the use of such incentives. And, recognising that the availability of a workforce with the necessary skills is a key determinant of where businesses locate their R&D activities, many countries are increasing their investments in tertiary education and training in science, engineering and technology.

Engineering accounts for only four per cent of all bachelor’s degrees in the US, compared with 19 per cent in Asia – which now accounts for half of all engineering degrees being awarded – and 33 per cent in China. Many countries are also changing their immigration laws to make it easier to attract highly skilled workers, especially scientists and engineers, who are increasingly mobile. Meanwhile, immigration policies in the US and Europe are making it more difficult to attract and retain such workers, compelling companies to shift R&D abroad to find the talent that they need.

As a result of these changes, the global landscape for innovation has been transformed over the past decade. Ours is now a world in which many emerging-market countries have made advancement in science and technology a top priority and in which multinational companies’ R&D investments have become much more mobile. As the US and other developed countries embark on austerity plans to contain their debt, they must heed these changes in the innovation landscape and boost their investments in R&D – and in science and engineering education – even as they make painful cuts elsewhere.

Laura Tyson, a former chair of the US President’s Council of Economic Advisers, is a professor at the Haas School of Business at the University of California, Berkeley.

A version of this article was first published on Project Syndicate.