A global perspective on innovation
India’s technology spend does not reflect the true picture. It has the talent to become a research powerhouse
The ongoing Covid-19 pandemic has once again focused attention on the importance of science and research for society and general economic progress. Researchers all over the world are scrambling to find a vaccine or a cure for the virus. Many technological trends have been accelerated as companies globally have been forced to adapt to the lockdown. Technology has never been more important, be it in ecommerce, education or telemedicine. In fact, technology spend has decoupled from the global gross domestic product growth and is experiencing a Vshaped recovery as most companies are having to ramp up their spending on digitalisation and next-gen business models.
The technology sector stocks have come roaring back from the lows in March, and have hit new all-time highs. Apple became the first non-sovereign company to cross $2 trillion in market capitalisation. Research and Development (r&d) has never been seen to be more important. Start-up activity has never been more robust.
But how do the countries and companies of the world stack up in terms of R&D? Who spends how much? Where is India in this picture?
The US has been the global leader in R&D spending for more than a century, but that margin of leadership has been narrowing for the last 20 years as China has begun to catch up.
Over the last decade, US R&D spending has risen by only 43 per cent compared to 200 per cent for China. In 2018, gross domestic spending on R&D in the US totalled $580 billion, across government, business and academia (source: OECD, GS). China for the same year spent a total of $550 billion. In 2008, the numbers were about $400 billion for the US and $125 billion for China. The gap has narrowed significantly between these two giants. The gap between the top two countries and the rest has also opened up, with Japan, the third largest spender on R&D, expending less than $200 billion. China and the US, combined, spend more than 55 per cent of the global spend on R&D. For context, India spends about $12-13 billion.
If we look at research spend as a percentage of GDP, the US after leading the world in R&D intensity in the 1980s, is today ranked eight with its spend at 2.8 per cent of GDP. China has an R&D intensity of 2.2 per cent of GDP today, up from 0.9 per cent in 2000, and is ranked 12th, the highest in emerging markets. The countries with the highest research intensity are Israel and South Korea, both of whom spend nearly 5 per cent of GDP on research and development. Indian R&D spend languishes at 0.6-0.7 per cent of GDP, and has unfortunately declined in percentage terms since 2008. We are also significantly below the global average of 1.7 per cent.
Over the last 20 years, global R&D spending has been growing at 4.6 per cent per annum in real terms compared to 2.9 per cent growth in global GDP. Global R&D spend has moved from 1.4 per cent to 1.7 per cent of global GDP in this period. The greater use and importance of technology in all aspects of life are apparent in the rising research intensity globally.
An interesting perspective is that 65 per cent and 80 per cent of the R&D spend by the US and China, respectively, is spent on development projects, not basic or applied research. The R&D dollars are spent on shorter cycle commercial projects to perfect a specific product or process. This is in sharp contrast to the EU countries. In France and the UK, for example, more than 60 per cent of the research spend is on basic and applied research. Money is spent to further our basic understanding of a field, not perfect a specific product or process. The Americans and Chinese seem more commercial in their spend.
In terms of sources of funding, business dominates in every country, but to varying degrees. In the US, business funds 65 per cent of the total research spend, while in China and Japan, the same ratio is 76 per cent. In the UK and France, with greater EU involvement, business only funds 54 per cent of the research spend. The balance everywhere is mostly by government.
When looking at companies and their individual spending on R&D, you realise that the top 100 companies spend almost 50 per cent of all spending by businesses on R&D ( source: OECD, GS). The largest spenders are the Silicon Valley tech giants. Amazon leads the pack with an R&D spend exceeding $30 billion. The second largest is Alphabet at $26 billion (source: Bernstein). The largest EU spender is Volkswagen with an R&D budget of almost $16 billion. In Asia, the top spenders are Samsung Electronics and Huawei, with an annual spend of about $ 15 billion each. The only other nonamerican company in the top 10 was Roche. Besides Volkswagen, every other company was either technology or life sciences. If you look at the top 20 global research spenders, all are from either technology, life sciences or Auto.
India had only one company in the list of the top 100 R&D spenders, Tata Motors, which spent about $350 million(ex JLR). The scale of the tech giants is incredible. Each one of them spends a multiple of India’s total annual spend on R&D.
While India seems to be far behind, the data does not capture the hundreds of captive R&D centres set up by global MNCS in the country. For almost every large MNC, their India captive accounts for a significant percentage of global headcount. This spend is shown on the profit and loss account of the global MNC, but all the money is being spent in India. In many areas, be it embedded software or chip design, Artificial Intelligence and analytics, serious capability has been developed in the country. India has far greater importance in the global R&D chain, then the dismal numbers highlighted above would indicate.
However, Indian companies have to raise their game. The government does not have the resources to scale research spending, and as is the norm globally, our companies will have to step up. China built its innovation engine as 85 per cent of all students (4.3 million) who received overseas degrees in the last four decades returned home. Given the state of US immigration policies, a reverse brain drain, back to India is inevitable. We must use this global talent in the most productive way possible. Investors have to encourage and reward risk-taking. Our markets are at times too focused on short-term profitability and returns. Research spend cannot be seen as a drag on profitability. The start-up ecosystem is slowly coming into place.
India has the talent to be an R&D powerhouse. Work from anywhere plays to our strengths. We have to raise our dismal rankings in the innovation sweepstakes.