Global Map of R&D Investment v3

8/9/2019 Global Map of R&D Investment v3

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Global Map ofResearch and Development (R&D)

Investmentby

Carlos Javier Flores Sarachoin partial fulfillment for the lecture given by

Dr. Efran Aceves Pia

Doctorado en DesarrolloCientfico y Tecnolgico para la Sociedad

CINVESTAV

May 2010

Go to References -1/18 Go to Contents


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Introduction

Much attention has been paid in recent years to the unprecedented pace and scale of todaysglobalization process. Globalization is having a particularly large impact on innovation. Thefollowing information is based on the the results of a global study made in 2008 by theOrganization for Economic Co-Operation and Development (OECD)1 and several other sources

investigated, which are enlisted in section References.

As stated by OECD in 2008, the scope for global collaboration isincreasing as more of the worlds regions possess importantresearch and innovation capabilities. So while the United States,the European Union and Japan have so far been the leaders inthis respect, countries such as China and India have a growingresearch and innovation capacity.

OECD:China and India have

a growing researchand innovation

capacity.

OECD: ...with theincreasingly globalsupply of Scienceand Technology(S&T) resources,emerging countriesare attracting moreR&D...

Most internationalization of R&D2 by Multi National Enterprises(MNEs) still takes place within the main OECD regions. However, with

the increasingly global supply of Science and Technology (S&T)resources, emerging countries are attracting more R&D [OECD,2008a].

An UNCTAD survey on future R&D investments found that China wasthe location mentioned most often, followed by the United States (seenext Figure 1 and sources therein). India was in third place, andRussia was also among the top ten target locations. Other emergingeconomies named were Singapore, Chinese Taipei and Thailand3.

1 [OECD, 2008], see References.2 Industrial R&D (Research & Development) is a key component of sustainable innovation-led growth

since it helps to create the higher value added products, processes and services on which the future of

companies increasingly depends, see [UK Trade, 2003].3 [OECD, 2009], p. 5.



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Companies arechanging how theyinnovate and buildglobally distributedR&D (and innovation)networks.

Growing research and innovation capacity has become a majorreason for companies to locate research and development (R&D)outside the home country.

While corporate R&D activities are still carried out predominatelyin the home country, companies are changing how they innovateand build globally distributed R&D (and innovation) networks.

The internationalization of R&D is not entirely new: in the 1980s, R&D investments mainly tookplace between developed countries, often through mergers and acquisitions.

While R&D investments remain mostly concentrated in the United States (yet), the EuropeanUnion, Japan and non-OECD economies, account for a growing share of the worlds R&D (seenext Figure).

The current internationalization of R&D has three distinguishing characteristics [OECD, 2008]:

(1) it is gathering pace because of the often greenfield investments

4

of multinationalenterprises (MNEs);(2) it is spreading to more countries, including developing countries, and

(3) it goes beyond adapting technology to local conditions.

4 A Greenfield Investment is the investment in a manufacturing, office, or other physical company-relatedstructure or group of structures in an area where no previous facilities exist. The name comes from the

idea of building a facility literally on a "green" field, such as farmland or a forest. Over time the term hasbecome more metaphoric. (Financial glossary, Reuters).



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How is globalization affecting R&D?

The rising cost and risk of R&D (because of its increasingly multidisciplinary character and growingcomplexity) and the growing global competition in innovation, have led firms to aim at reducingR&D costs while speeding up the development process. This has led companies to sourcetechnology and knowledge from abroad and rely more on external sources of innovation.

The increasing globalization of science and technology capabilities and the larger number oflocations with attractive science and technology bases have widened the opportunities for R&D-investment abroad.New technological opportunities, notably ICT (Information and Communications Technologies), areamong the main drivers of the internationalization process as these have enabled new ways ofcollaboration and have led to greater specialization in the global innovation system.

Advances in ICT have also facilitated the management of dispersed innovative activities andenabled the outsourcing of R&D. For instance, developments in the codification andstandardization of R&D processes have increased the possibilities to segment R&D activities anddisperse R&D stages over different locations.

What is the role of multinationals?

Foreign Direct Investment (FDI)5 plays a major role in theinternationalization of R&D, and Multinational Enterprises (MNEs)are the main actors.

More than 95% of the 700 firms worldwide with the largest R&Dexpenditure are MNEs; they account for close to half of the worldstotal R&D expenditure and more than two-thirds of the worlds

business R&D.

More than 95% ofthe 700 firms

worldwide with thelargest R&D

expenditure are

MNEs (MultinationalEnterprises)

The top R&D-performing MNEs often spend more on R&D than many nation states and theirpresence is felt not only through activities in their home countries but also increasingly abroad.Table 1 shows top 20 world Firms by R&D expenditure in the world. Table 2 shows top 20 worldFirms by R&D expenditure in the developing economies.

Table 1 shows that the top 20 firms are located in the US (8), Japan (4), Germany (2), Switzerland(2), Sweden, Finland, and the UK (1 each), according to these 2003 data. Table 2 shows the top20 Firms by R&D expenditure (2003).

A survey (in 2005) by the United Nations Conference on Trade and Development (UNCTAD) of the

largest investors in R&D suggests that the pace of internationalization in R&D is accelerating.

As many as 69% of the responding firms stated that their share of foreign R&D is set to increase(only 2% indicated a decline and the remaining 29% expected the level of internationalization toremain unchanged).

5 Foreign direct investment (FDI) is defined by IMF (1993, 2003) and OECD (1996) as a long terminvestment by a foreign direct investor in an enterprise resident in an economy other than that in whichthe foreign direct investor is based. In order to qualify as FDI the investment must afford the parententerprise control over its foreign affiliate. The UNCTAD defines control in this case as owning 10 per cent

or more of the ordinary shares or voting power of an incorporated firm or its equivalent for anunincorporated firm (see Website A).



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These survey results are confirmed by more systematically gathered data on outward R&Dinvestment of Multi National Enterprises.

For countries for which data areavailable, R&D performed abroadhas increased since 1995 relativeto R&D performed at home (Figure

3). The only exception isSwitzerland which has seen aslight decrease, but Swissaffiliates abroad still do as muchresearch as all companies insideSwitzerland.

Only 1% of the top 700 R&Dintensive firms are based indeveloping countries6 (includingSouth East Europe andCommonwealth of IndependentStates -CIS-7).

The R&D investments of those 700 firms were largely spread across the following industries: IThardware, automotive, pharmaceuticals and biotechnology, electronic and electrical, IT softwareand computer services, chemicals, aerospace and defense, engineering, telecommunications, andhealth-care products and services. More than half of the total investments were concentrated onthree industries: IT hardware, automotive, and pharmaceuticals-biotechnology8. -Table 2b showssome figures for 2003 (2002 in brackets).

Additionally, the aforementioned UNCTAD's Survey (2005),states that the average firm invested 28% of its R&D budget

abroad (see next Table). It also found that that degree ofinternationalization of R&D among firms varied according totheir home base. For example, Japanese and Korean TNCs(TransNational Companies or Multinational Enterprises),have the lowest share of foreign R&D (15% and 2%respectively), while the European TNCs have the highestshare (41%) and the share of US based firms was 24%.

This is clearly shown by Table 3. However, this scenario hasbeen changing as both Japanese and the US based TNCsare also increasingly trying to internationalize their R&Dactivities, particularly expanding their R&D bases in selected

developing countries9.

The degree of internationalization varies across industries. Itis over 45% in Chemicals, over 35% in Pharmaceuticals,over 30% in automotive, and electronics, 30% in IThardware, and 20% in others (see Table 4).

6 [DIIPER, 2008] p. 12.7 CIS, or "Commonwealth of Independent States". They consist of (what was used to) the Soviet Union

countries: Russia, Ukraine, Kazakhstan, Belarus, Azerbaijan, Uzbekistan, Turkmenistan, Georgia,Armenia, Tajikistan, Kyrgyzstan, Moldova .

8 [DIIPER, 2008] p. 12.9 Ibid. p. 8.



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Which countries are attracting R&D investment?

Most R&D investment still goes to OECD countries, and the United States is the most important

receiving country.

While most internationalization of R&D by Multi National Enterprises still takes place within themain OECD regions, emerging countries increasingly attract R&D investments although theseremain relatively small in a global perspective. A 2007 study by the Economist Intelligence Unit10 ofmore than 300 senior executives identified India (26% of respondents), the United States (22%)and China (14%) as the most attractive overseas locations for R&D. (Note: Compare thisinformation to Figure 1).

The large increases in foreign R&D investment in developing Asia and particularly in China andIndia have attracted much attention in recent years. According to official Chinese statistics, 1160foreign R&D centers had been established in China by the end of 2007, most of them after 2001.

This shift towards emerging countries is expected to continue, as demonstrated by the findings onfuture R&D investments in a survey by the UN Conference on Trade and Development (UNCTAD)in 2007-2008. China was the location mentioned most often, followed by the United States. Indiawas in third place, and Russia was also among the top ten target locations. Other emergingeconomies named were Singapore, Chinese Taipei and Thailand.

10 The Economist Intelligence Unit (EIU) is part of the Economist Group. It is a research and advisorycompany providing country, industry and management analysis worldwide and incorporates the formerBusiness International Corporation, a U.S. company acquired by the parent organization in 1986. It is

particularly well known for its country profiles, monthly country reports, five-year country economicforecasts, country risk service reports and industry reports. See Website B.



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BRICS (Brazil, India, China and South Africa) Economies:FDI in R&D

Table 5 provides the comparison of Foreign Direct Investment (FDI) annual overview acrossBRICS economies (between 1990 and 2006), and FDI as percentage of Gross Fixed CapitalFormation (GFCF).

It is clear that among the BRICS economies, China tops the annual FDI inflow, followed by Brazil,and India. However, in terms of FDI as percentage of Gross Fixed Capital Formation, Brazil topsthe table followed by China and India. (Note: South Africas annual FDI inflow and FDI as

percentage of GFCF are inconsistent).

To have a reference of the amounts of FDI into these countries compared with Mexico, thefollowing information is pertinent (see next figure).

This figure indicates, when Mexico is compared with Brazil, that up to 2006 Mexico wins the FDIcompetition against that country. The behavior for Mexico, beginning from the peak of 2007, has

been a slow down movement in FDI till today (2010).



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A note on FDI versus R&D foreign investment

According to an EuroActiv Network discussion on Foreign Direct Investment in R&D (see WebsiteD), Foreign Direct Investment (FDI) is investment of foreign assets directly into a domesticcompany's structures, equipment, and organizations. It does not include foreign investment into thestock markets.

Moreover, FDI in Research and Development (R&D) means investment in creative workundertaken systematically to increase the stock of knowledge and its application includingbasic research, applied research, and experimental development. The question here is if, forexample, Colgate Palmolive industries in foreign countries should or should not be considereddevelopment (The R in R&D). In this brief work we state that An indirect value of foreign R&Dinvestment in an economy could be FDI (more of this latter).

Are there new reasons for taking R&D abroad?

The traditional motive of FDI in R&D is to serve as a conduit for exploiting intellectual assetsdeveloped in the Multi National Enterprise's home country. Accordingly, R&D in affiliates abroad isadaptive, designed to customize technologies developed in the home country to fit local conditions.Motives for decentralizing this type of R&D are primarily demand-oriented and related to marketproximity.

Technological knowledge tends to flow from the parent firms laboratory to the foreign-based facilityso that the affiliates technological advantages primarily reflect those of the home country (wherecore innovation activities continue to be concentrated) while foreign R&D units tend to exploit theparent companys technologies.

In recent years, owing to changes in the competitive, international and technological environment,MNEs have complemented this decentralized, adaptive R&D with more innovative R&D abroad.Innovation strategies increasingly use global sourcing to tap into new market and technologytrends worldwide and to develop new ideas which they then implement worldwide.

To absorb local sources of knowledge, foreign subsidiaries need to be embedded in the hostcountrys innovation system but also in the firms organizational network.

The shift towards subsidiaries that are actively engaged not simply in incremental, adaptive R&Dbut also in radical innovation reflects the increasing importance of supply-related location factorsand the presence of scientific and technological skills.

Location decisions for these kinds of R&D facilities are related to the host countrys technologicalinfrastructure, the presence of other firms and institutions that may create benefits which investingfirms can absorb, access to trained personnel, established links with universities or governmentinstitutions, the existence of an appropriate infrastructure for specific kinds of research, etc.



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Why locate R&D in emerging countries?

As already shown, surveys indicate that China and India, among others, are now considered veryattractive locations for future investment because of their large and rapidly growing markets andtheir large pools of qualified workers with relatively low labor costs (although they are rising).

They combine low wages and a good education system with a large mass of well-trainedresearchers. Typically, while the number of R&D personnel as well as R&D investments inemerging countries may look small in relative terms, the absolute numbers give a different picture(Figure 2). Note: S&T stands for Science and Technology.



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Global R&D, a complex issue

The following picture accounts for the patterns of FDI intraregional flows in Asia. It is a rathercomplex issue and we recurred to numbers (as well as tables) instead of graphics in order to havea general idea of the phenomena. (In this picture, for example, Australia is not included).

Source: [UN, 2006].



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Summary

1. Most internationalization of R&D by Multi National Enterprises still takes place within themain OECD regions. However, with the increasingly global supply of Science andTechnology (S&T) resources, emerging countries are attracting more R&D.

2. Surveys indicates R&D investments are tipping towards China as the number one location,

followed by the United States, India is in the third place, being Mexico the 23th

location inpreference. (see figure 1).3. China and India, among others, are now considered very attractive locations for future

investment because of their large and rapidly growing markets and their large pools ofqualified workers with relatively low labor costs (although they are rising).

4. The increasing globalization of science and technology capabilities and the larger numberof locations with attractive science and technology bases have widened the opportunitiesfor R&D-investment abroad.

5. Growing research and innovation capacities in foreign countries has become a majorreason for companies to locate research and development (R&D) outside the homecountry.

6. New technological opportunities, notably ICT (Information and Communications

Technologies), are among the main drivers of the internationalization process as thesehave enabled new ways of collaboration and have led to greater specialization in the globalinnovation system.

7. Advances in ICT have also facilitated the management of dispersed innovative activitiesand enabled the outsourcing of R&D.

8. Foreign Direct Investment plays a major role in the internationalization of R&D, andMultinational Enterprises are the main actors.

9. The top R&D-performing Multinational Enterprises often spend more on R&D than manynation states and their presence is felt not only through activities in their home countries butalso increasingly abroad.

10. Surveys on the largest investors in R&D suggests that the pace of internationalization inR&D is accelerating. Most firms stated that their share of foreign R&D is set to increase.

11. Only 1% of the top 700 R&D intensive firms are based in developing countries. This levelindicates either there's a lot of potential for divesting R&D.

12. The R&D investments of those top 700 firms were largely spread across the followingindustries:

IT hardware, automotive, pharmaceuticals and biotechnology, electronic andelectrical, IT software and computer services, chemicals, aerospace and defense,engineering, telecommunications, and health-care products and services.

13. More than half of the total investments were concentrated on three industries:

IT hardware, automotive, and pharmaceuticals-biotechnology.14. Japanese and the US based Multinational Enterprises are increasingly trying to

internationalize their R&D activities, particularly expanding their R&D bases in selecteddeveloping countries.

15. The degree of internationalization varies across industries:

It is over 45% in Chemicals, over 35% in Pharmaceuticals, over 30% in automotive,and electronics, 30% in IT hardware, and 20% in others.

16. Most R&D investment still goes to OECD countries, and the United States is the mostimportant receiving country.

17. Emerging countries increasingly attract R&D investments although these remain relatively



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Answers to questions

Which are the consequences of R&D investment being incrementally globalized?

Answer:

Countries, in order to attract Foreign Direct Investment and concomitant R&D investment, arecompeting by building individual country's strengths. They present to the (potential) investor anattractive picture such as this:

Excellent framework conditions. Key factors in locating R&D are political stability, publicinfrastructure, market size and development, tax rates and labor market conditions. (Thinkfor example the case of China).

An excellent innovation system based on local strengths. A strong and vibrant researchbase, effective protection of intellectual property rights and a well-trained workforce asmajor determinants for investment in R&D and promoting the growth of domesticenterprises.

Stronger international linkages. This involves supporting the internationalization of publicresearch organizations, fostering the international mobility of researchers, and linkingdomestic firms to foreign sources of innovation.

Policy coherence. This involves co-ordination across various policy areas (education,science and innovation, but also macroeconomic, trade, fiscal, competition, developmentand employment policies) as well as vertical co-ordination at regional, national and inter-national levels of governance.

It is not United States the (most prominent) country where investment is concentrated.

What is the contribution (in this sense) from new players in the field such as China, India,Brazil, South Korea, and Mexico?

Answer(s):

(1) According to an Industry Week Report from April 21, 201011:

One of the great strengths of the U.S. economy is its deep tradition of research andinnovation. Despite relentless foreign competition, U.S. R&D leadership has held upwell in recent years.

When measured on a value-added basis, U.S. manufacturing is the global leader in

high-technology goods: it holds around a 30% global market share, about the sameas in 1995.

This leadership is founded on our dominant position in global research expenditures,and on the excellence of our scientific and engineering research institutions.According to estimates produced for R&D Magazine, U.S. R&D expenditures in2010 will be about $402 billion, slightly ahead of all Asian countries and well aheadof Europes $268 billion.

In conclusion, United States is the most prominent country where R&D investment isgenerated.

11 (See Website C).



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R&D is also concentrated in the US, since decentralization is taking place (as was shown)in a rather slow pace (see for example conclusion 11: Only 1% of the top 700 R&Dintensive firms are based in developing countries; See also figure 2 where global share oftotal R&D for US, China, and some other countries is depicted in percentage, where USstands out in R&D investment.

(2) In this work we are focused in R&D investment from foreign sources, and not in theown R&D investments made in the country by the country itself. An indirect value of foreignR&D investment in an economy could be FDI. From Table 5 (and Cuadro 1), we can seethat in 2006, the world's FDI was $1,305,852 million US dollars; South Korea $71,00012;China accounted for $69,868 of that amount; Mexico, $19,946; India, $16,881; and Brazil, $18,782. See next table.

Comparison of FDI investments (2006)

FDI Investment Value in Million US Dollars ($) Percentage (%)

World's $1,305,852 100.00%South Korea $71,000 5.44%

China $69,868 5.35%

Mexico $19,946 1.53%

India $16,881 1.29%

Brazil $18,782 1.44%

This is the contribution (share) of world's FDI investment equivalent in US dollars for SouthKorea; China; Mexico, India, and Brazil. R&D investment is only a part of this type ofinvestment, but they are directly related (correlated). Foreign direct investment (FDI), bydefinition is a long term investment so the correlation with R&D may be established (seenote 2 and 5, as well as the Section A note on FDI versus R&D foreign investment in thiswork).

12 This currency figure based on [OECD, 2008b], p. 4.



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References

[UK Trade, 2003]. THE 2003 R&D SCOREBOARD . The top 700 UK & 700 Internationalcompanies by R&D Investment . COMMENTARY AND ANALYSIS Part 1 . UK Department ofTrade and Industry. Available at:http://www.innovation.gov.uk/rd_scoreboard/downloads/2003_rd_scoreboard_analysis.pdf

[Foro, Innovacin, 2006]. Conocimiento e Innovacin en Mxico: Hacia una Poltica de Estado.Elementos para el Plan Nacional de Desarrollo y el Programa de Gobierno 2006-2012. ForoConsultivo Cientfico y Tecnolgico en Mxico. Dr. Jos Luis Fernndez Zayas, CoordinadorGeneral. Noviembre 2006.

[UN, 2006]. World Investment Report 2006. FDI from Developing and Transition Economies:Implications for Development . United Nations (2006)p. 88.

[UNCTAD, 2005-2008].World Investment Report. UNCTAD, United Nations, 2005, 2006, 2007and 2008.

[DIIPER, 2008]. Foreign Direct Investment and Internationalization of R&D: The Case of BRICSEconomies . Development, Innovation and International Political Economy Research (DIIPER) ,Aalborg University . Denmark . DIIPER Research Series . Working Paper No. 7 ( 2008). ISSN1902-8679

[OECD, 2008].Research and Development: Going Global . Policy Brief. OECD (2008 ).

[OECD, 2008a]. The Internationalisation of Business R&D: Evidence, Impacts andImplications. OECD, Paris. (2008).

[OECD, 2008b]. NEW DIRECTION OF KOREAS FOREIGN DIRECT INVESTMENT POLICY IN

THE MULTI-TRACK FTA ERA: INDUCEMENT AND AFTERCARE SERVICES , by Choong YongAhn, Ph.D . OECD Global Forum on International Investment . OECD Investment Division (2008).

[OECD, 2008c]. CHINA AND THE GLOBALISATION OF RESEARCH AND DEVELOPMENT .OECD REVIEWS OF INNOVATION POLICY: CHINA ISBN 978-92-64-03981-0 . OECD (2008 ).

[OECD, 2009]. The development of global innovation networks and the transfer of knowledge , byDirk Pilat, Koen De Backer, Ester Basri, Sarah Box and Mario Cervantes . OECD AND THEINTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT/THE WORLD BANK(2009 ).

Website A: 2006 Index of Economic Freedom: South Africa. Seehttp://www.heritage.org/research/features/index/country.cfm?id=SouthAfrica

Website B: The Economist Intelligence Unit:http://www.eiu.com/site_info.asp?info_name=about_eiu

Website C: Industry Week. The Competitive Edge -- Is U.S. R&D Investment Holding Up?

http://www.industryweek.com/articles/the_competitive_edge_--_is_u-s-_rd_investment_holding_up_21553.aspx

Website D: Foreign Direct Investment in R&Dhttp://www.euractiv.com/en/science/foreign-direct-investment-rd/article-142013

CJFS

http://www.euractiv.com/en/science/foreign-direct-investment-rd/article-142013http://www.euractiv.com/en/science/foreign-direct-investment-rd/article-142013

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