Global competition sparks spending spree

Large companies are pouring money into research and development at an unprecedented rate, in response to growing global competition. The international R&D Scoreboard, published on Monday, shows a 7 per cent increase in spending by the world’s top 1,250 companies.

“In many sectors profits are growing strongly and companies can afford to spend more on R&D,” says Norman Price, an industrialist at the UK Department of Trade and Industry, which publishes the annual scoreboard. “Where profits are weak, such as the automotive industry, the competition is so fierce that companies dare not cut their investment.”

But the scoreboard – the world’s most comprehensive R&D ranking – provides little reassurance for European policymakers who are concerned about Europe’s poor long-term R&D performance. European companies spent 5.6 per cent more in 2005-6 than the average of the previous four years. The comparable increase for US companies was 15.4 per cent.

The most spectacular growth is in Asia. The 44 Taiwanese companies in the scoreboard increased their R&D investment by 30.5 per cent last year, while the 17 South Korean companies posted 11.9 per cent R&D investment growth.

While Taiwanese R&D is spread among a number of electronics and computer companies, the Korean scoreboard is dominated by three fast-growing giants: Samsung and LG in electronics, and Hyundai in cars.

Samsung’s R&D spending has grown to $5.44bn (€4.3bn, £2.9bn) from $1.88bn over the past four years. “The way Samsung has poured resources into R&D has had an impact elsewhere in the electronics industry, with other companies increasing spending so as not to be left behind,” says Mr Price.

But R&D growth in Japan remains modest – a continuing legacy of the country’s long period of economic stagnation. Japanese companies raised spending by 4 per cent in 2005-6 and their investment was only 5.9 per cent above the average of the previous four years.

The most striking sectoral change in the scoreboard since its inauguration in 1992 has been the rise in pharmaceuticals, which provided no companies among the top 20 R&D spenders 14 years ago and has six entries now. In contrast, the telecoms and chemicals industries, each of which had two top-20 companies in 1992, have none now.

The automotive sector has held the top spot from the start: General Motors for most of the 1990s and Ford or DaimlerChrysler since then. A pharmaceutical company, Pfizer, was widely predicted to take the lead in 2005-6 but this has not happened. Ford increased its R&D spending by 8 per cent to $8bn – determined to innovate in the face of stagnant sales and falling profits – while Pfizer was one of the very few pharma companies not to spend more on R&D last year.

Aerospace and defence showed the fastest R&D growth of any sector in 2005-6 (13.5 per cent) as companies responded to governments’ rising defence budgets. Next was oil and gas (11.8 per cent) in response to rising energy prices. Software (8.9 per cent) and pharmaceuticals (8.3 per cent) also showed above average growth.

At the other extreme, R&D spending in the chemicals sector fell 0.9 per cent in 2005-6 and is 3.3 per cent below the average of the previous four years. Well-known chemicals companies whose R&D appears to be on a downward trend include Bayer, BASF, Akzo Nobel, ICI, Clariant and Rhodia.

Looking at the broader trends in corporate R&D, Georges Haour, professor of technology and innovation management at IMD business school in Geneva, says the two most important are “open innovation” and the move to Asia. Open innovation – a term coined by Henry Chesbrough of the University of California, Berkeley – means the end of the traditional R&D centre where scientists worked on confidential corporate projects in relative isolation from the outside world. Instead, companies are working with growing networks of external partners to commercialise their internal innovations and find other people’s inventions to exploit.

Linked to open innovation is the move by western companies to set up R&D centres in Asia, particularly China and India, in search of new sources of innovation. “They want to take advantage of all the talented people in Asia and the dynamic markets there,” says Prof Haour, with cost saving a secondary consideration.

The scoreboard shows that indigenous Chinese and Indian companies are still funding relatively little R&D of their own. The only Indian companies that feature are Ranbaxy and Dr Reddys in pharmaceuticals and Tata Motors. Analysis showed that several well-known technology companies in India, including Wipro, Infosys and Biocon, still spent less on R&D than the $33m minimum required to make the global top 1,250.