The FINANCIAL — Asia has become the top destination for corporate R&D spend in 2015, accounting for 35% of total in-region R&D, including both domestic and imported R&D. This places Asia ahead of North America and Europe, who dropped to third, in a complete reversal from 2007 when Europe was the previous leader. This is according to the newly released 2015 Global Innovation 1000 Study, from Strategy &, PwC’s strategy consulting business, which uniquely examined the R&D footprint of 207 of the world’s largest corporate R&D spenders.
Robust growth in China and India drove Asia’s growth, recording increases of 79% and 116%, between 2007 and 2015, in imported spend, respectively, as more R&D moves into these regions mainly from the US. Results find that China in particular has become the most popular destination, with 71% of R&D professional survey respondents indicating that the most important reason for moving R&D to China is proximity to high-growth markets. They state other benefits of moving R&D functions to China include: “proximity to key manufacturing sites,” “proximity to key suppliers,” and “lower development costs.”
“Asia taking the lead as the top destination for corporate R&D is not surprising when you look at where companies are spending their R&D dollars to support their revenue growth goals – a prime indicator of how R&D is trending globally – and how much of R&D is headed to the Asia region,” says Barry Jaruzelski, a US firm principal with Strategy& as well as the study’s creator and lead-author.
Europe Falls Behind On Corporate R&D Spending; France & Germany Main Factors
The study finds that Europe’s fall to the third largest region for corporate R&D spend is a result of low growth in domestic and imported R&D, coupled with a substantial rise in exported R&D – particularly from France and Germany. Comparatively, Europe’s domestic R&D spend growth has risen just 2% between 2007 and 2015, compared to gains of 40% in North America and 60% in Asia. At the same time, European countries have increased their R&D allocation to high-cost offshore countries in North America and Asia, but not to nearshore Western Europe. In particular, France has decreased domestic R&D by 20%, has decreased imported R&D by 21% and has increased exported R&D by 46% between 2007 and 2015. Additionally, while Germany’s domestic R&D has increased 48%, imported R%D has fallen 7% and exported R&D has increased 76% between 2007 and 2015.
“Europe went from being the largest region for the execution of corporate R&D to the third behind Asia and North America – it’s the hollowing out of Europe,” comments Barry Jaruzelski. “The high growth of exported R&D to other countries, particularly from France and Germany, are huge factors in this reversal.”
The US Remains The Largest Spender Of In-Country Corporate R&D, Whether Domestic, Imported Or Exported
According to this year’s results, the US remains the largest spender of in-country corporate R&D, with in-country (domestic & imported) R&D spend at $145 billion in 2015, up 34% since 2007. Imported R&D spend to the US, mostly coming from Europe, in 2015 is $53 billion, up 23% from 2007. Exported R&D spend in 2015 is $121 billion, up 51% from 2007, predominantly going to Asia where previously in 2007 it was going to Europe. Despite these figures, the US lead over other countries is narrowing – in 2007, relative corporate R&D in China was 23% of the US total, while in 2015 it now amounts to 38% of the US total.
“While the US lead may be tapering, it still remains the biggest global market and despite the high cost of labor, it offers a more agile and sophisticated workforce. As such, companies look at the US as a desirable market with a capable workforce, an innovative culture and a more flexible business environment that cultivates top talent, all of which are conducive to R&D functions. The US also has accessibility to strategic markets, which is desirable to foreign companies when exporting their R&D functions, with Silicon Valley a particularly powerful draw,” comments Barry Jaruzelski.
Globalization Advantage
As globalization increasingly becomes the norm (94% of firms conduct R&D beyond just their home country), companies are reaping the benefits of conducting R&D outside of their home country. Companies with more global R&D footprints now perform as well or better than companies with a narrow footprint, the study finds, suggesting that there are material advantages to exporting R&D and that multinationals are able to coordinate successfully across many global sites.
Additionally, companies seem to derive benefits from a diverse global footprint as survey respondents say access to technical talent (71%), being close to customers (68%) and gaining insight into local market needs (64%) are important attributes in choosing where to conduct R&D.
In addition, Strategy&’s annual analysis of the world’s 1000 largest R&D spenders found:
R&D has returned to its long-term growth trend post-financial crisis: In 2015, R&D spend by the Global Innovation 1000 has increased 5.1% to $680 billion, the largest year-over-year increase within the last three years, moving it back to a long-term average growth rate post the financial crisis, with a 10-year CAGR of 5.4%.
Industry Breakdown: The three largest industries for R&D Spend in 2015 are computing and electronics (C&E), healthcare and auto. In particular, healthcare is on track to pass C&E as the largest industry by R&D spend by 2019. Meanwhile, the software & Internet industry has the highest growth rate of all the industries between 2014 and 2015 (27%), pushing it past the industrials sector to become the fourth largest industry by R&D spend in 2015. “It is not surprising that the software & Internet industry surpassed the industrials sector as the fourth largest spender of R&D. However, it is a noteworthy milestone, marking how software, the new economy, is trading places with industrials, the older economy,” says Barry Jaruzelski.
Top 20 R&D Spenders: Within the Top 20 R&D spenders of 2015, the top three companies have remained fairly consistent over the years – Volkswagen, Samsung, Intel. For the first time Apple has joined the Top 20 R&D spenders 0f 2015 list at #18.
Top three Most Innovative companies in the world for 2015: Global innovation professionals have ranked Apple, Google, and Tesla as the three most innovative companies in the world, with Tesla jumping to third place from fifth in 2014.
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