The State of Innovation Investment

By: Georges Haour

As western countries jump further into the embrace of open innovation, countries in Asia are forging ahead with innovation investments through R&D. R&D spending is up 27% in India and 40% in China, year on year but in decline globally. Georges Haour runs a rule over the numbers and what they mean for the outlook of the enterprise.

We all know that the economic crisis put a big dent in investments in R&D/ innovation. But in the world of innovation, the quality of output is more critical than the amount of input. Indeed, a conceptual innovation may cost essentially nothing and bring handsome profitable growth.

Input figures and patents filings, constitute the best overall ‘rough’ indicators available. As we head into year two of the recovery, generally optimistic about open innovation, what’s the state of innovation investment and R&D spending? How does R&D investment look in different parts of the world? How have companies responded? The “crisis of the century” has been marked by two unprecedented events:

1. For the first time ever, the number of Patent Cooperation Treaty (PCT) patent applications worldwide has decreased year on year (in this case, 2009 dropped compared to 2008). While the decrease is not large (5%), it does mark the first time ever that this number dropped since the advent of the PCT system, in 1978. The Patent Cooperation Treaty is managed by the World Intellectual Property Organisation, WIPO, in Geneva. Although the figures are not available for 2010, it is clear that western companies have continued to carefully scrutinize what to protect, using the relatively costly business tool of patenting.
2. The overall amount of investments in R&D by companies worldwide, has decreased by two percent in 2009. This marked the first time in more than a decade that there was a drop. This decrease is modest, in comparison with the overall drop in sales – 10% on average – of these firms in the period. In previous economic crises, firms tended to clearly reduce R&D budgets and adjusted them with anticipated lower sales volumes. This time, companies overall seem to have considered these investments more crucial than ever for their competitive position.

Contrasted impact across regions

The above, global situation greatly varies across the globe. In India, firms overall have increased their R&D investments by 27% in 2009, as compared with 2008. The numbers for 2010 are likely to show a similar increase. In China, the corresponding increase is 40%. In what is sometimes called “the new geography of innovation”, these two giants are fast becoming sources of innovation, not only for their large, dynamic domestic markets, but for the whole world.

For the technical powerhouse of Japan, firms indicated an overall increase of 3% for their R&D budgets, as they entered the new fiscal year, on April 1, 2009. During that year, they actually decreased these by 12%. In January 2011, Japan’s Prime Minister announced a 30% increase in scientific grants for the fiscal year 2011/12.

Meanwhile, the combined R&D investments of the 27 countries of the European Union dropped 2.6%. This is half of the corresponding decrease in the USA. As usual, managing for quarterly results drives US firms to drastically cut innovation investments as soon as the economic horizon darkens.

Effect of the crisis for firms

The response to the crisis has varied also depending on the industrial sector. The 2009 innovation budget of the automobile industry has been slashed by 13% worldwide (in the case of Renault it is 27%). In contrast, during the same year, pharmaceuticals and commodities have increased their efforts in this area For example, Basel-based powerhouse Roche is a top investor, with an 11% increase.

The situation in Asia is different: western companies have not reduced their R&D investments in China or India. As an example, Boeing markedly increased its R&D in India. In the healthcare sector, Sanofi Aventis and Roche did not delay the substantial expansions of their research facilities in Shanghai, while, late in 2008, Nestlé confirmed its plans to build a Euro 10 mio. laboratory in Beijing. In 2009, Applied Materials opened the world’s largest center on solar research, in X’ian, as China has already close to 40% of the world’s market of solar panels.

Conversely, Asian firms have begun investing in laboratories in OECD countries: Huawei bought a telecom laboratory in France, while Goodbaby, China’s largest prodcuer of babay and infant products, set up a R&D unit in Utrecht, Netherlands. No doubt, these moves should lead to more acquisitions, not only purchases of laboratories. China’s assertive companies, with deep pockets, will buy many more assets in Europe in the near future.

Conclusion

Overall, faced with the “crisis of the century”, firms have somewhat protected their investments in R&D/innovation. One would hope that the trauma of the crisis contributed to focus companies on true value- and job- creating activities.

One thing is clear: the crisis has dramatically accelerated the shift of power from the “west” to the new world of Asia as measured by R&D investments. Similarly, the world’s center of gravity for innovation is shifting eastwards. As a result, firms must much better integrate China and India – and Brazil to a lesser degree – without overlooking Japan – into their worldwide array of R&D activities.

This will require huge efforts and change of mindset. Aside from a few exceptions, top executive teams and boards of western companies are ignorant about the history and the fast changing reality of China. Western headquarters indeed consider the Far East as a very important region for business, but in truth, people in on the terrain in Asia feel very far from headquarters in Frankfurt or Paris.

The ethnocentric ways of western firms prevent them from truly integrating this new world. If this is the case for markets and sales, it is even more so for the utterly uncertain world of innovation/R&D. In this area, most western firms need a “Marco Polo” program to catch up. This indeed includes effective scouting of knowledge and research resources available in universities in India and China.

By Georges Haour