The geography of innovation
Comment of the Day

September 27 2010

Commentary by Eoin Treacy

The geography of innovation

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A range of measures suggests a changing and more global innovation landscape. While the United States and Japan remain leaders in science and technology innovation, they face increased competition from leading growth markets, notably China. R&D spending in Asia exceeds EU levels and is likely to overtake US levels in the next five years. This principally reflects strong growth in China, now the world's third leading R&D investor (at $100 billion), behind the United States (at $325 billion) and Japan (at $123 billion). The government's target of spending 2.5% of GDP on R&D by 2020 would translate into a tripling of China's R&D investment over the next decade, to $300 billion.

While ambitious government goals for R&D intensity suggest continued growth in R&D spending in China and a relative reweighting of the global total, broader changes in R&D investment are largely driven by the corporate sector in many markets. Industry finances the majority of R&D investment spending both in the United States and Japan as well as across many growth markets. Industry finances more than 65% of total R&D spending in the United States, 70% of total R&D spending in China, and approximately 75% of total R&D spending in Korea and Japan. Companies driving this shift are those in pharmaceuticals, computer and electronic products, and transportation equipment, as well as those in some professional, scientific, and technical services fields.

Along with a shift in R&D investment we find that emerging markets are home to a rising share of global patenting activity, improved high-tech trade balances and strong labor productivity growth, which further affects incentives for R&D investment and employment.

The global dispersion of innovative activity enables companies across a range of sectors to rethink where they operate and invest, making several markets, including China and India, increasingly attractive to corporate R&D investment and employment.

Eoin Treacy's view Many of those arguing against the reality of China's emergence as a country that produces ideas have identified the lack of Chinese global brands as evidence of the failure of command capitalism to promote creativity and entrepreneurship. However, this line of argument neglects the contention that this type of development can take time and ignores the fact that emerging countries such as China are investing heavily in human capital as well as the infrastructure needed for technical innovation.

From the perspective of a long-term global investor the trajectory of how human capital is fostered is perhaps more important than current absolute levels. Asian countries in particular are churning out increasing numbers of graduates in the science and engineering fields and are therefore maximising the chances of one of their citizens fostering a globally significant brand.

The USA in particular has a spectacular record in producing world class companies founded on an innovative engineering / technical solution. However, companies are increasingly relying on foreign educated talent to sustain their businesses and inevitably at least some of these people will seek to go it alone in their home markets. India has a large number of internationally significant companies and despite a slow start China is making inroads perhaps most notably with BYD, Lenovo and more recently wind turbine manufacturers.

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