In a global survey of 562 executive participants, R&D leaders expressed concerns about the growing heat of rhetoric about economic nationalism – and its potential impact on companies’ R&D investments and how they conduct corporate innovation.
Major companies have been conducting some R&D outside their headquarters countries for decades. In 2015 it was determined that 94 percent of major corporations conduct their R&D in multiple countries. But increasing attention on regulations and policies for visas, labor movement, and the regulations governing the sharing of knowledge and technology are causing some companies to question how sustainable their integrated global innovation networks are.
In a new PwC Strategy& survey on corporate innovation, it said annual worldwide corporate R&D spending broke through $700bn in annual investment, based on its an annual analysis of R&D spending across 1000 global public companies.
It shows corporate R&D spending increased a steady 3 percent in the past year, bouncing back from less than 1 percent increase previously. Overall, 52 percent of respondents say that a general move toward economic nationalism will have a moderate or significant impact on their companies’ R&D efforts.
Nearly 33 percent of R&D executives surveyed report that they have already felt the effects of economic nationalism on their R&D talent acquisition or retention because of visa or work restrictions — either losing employees, seeing less talent available, or in hiring more local talent.
- Although nearly 66 percent of all participants surveyed say they have not experienced pressure to change their approach to innovation in their headquarters country to date, 23 percent say they have already experienced such pressure in another country.
- Almost 50 percent of the companies in North America plan to make changes to their R&D programs over the next two years in response to the changing political environment.
- Survey participants believed US, UK, and China could be most at risk from potential changes in policy that could impact R&D investment. Both the US and UK’s talent flow could be at risk of potential disruption while China’s decline in corporate R&D spending and reliance on R&D investment from abroad could be at risk.
- Canada, Germany, and France are likely to gain if protectionist policies broadly become a reality.
“There’s no doubt that uncertainty is causing concern for medium and long term plans, irrespective of whether policy realities actually follow political rhetoric,” comments Barry Jaruzelski, principal, PwC US, Strategy&.
“Although the goals and levels of investment in corporate innovation will likely not change if economic nationalism continues to develop, the global innovation model would need to evolve. At many companies, what is now a nimble, interdependent network may become a group of more autonomous hubs, hiring specialist technical talent in local regional markets and opening future R&D centers in regional markets. It could mean companies losing efficiency and taking on higher costs if it is not managed effectively,” commented Jaruzelski.
Global innovation 1000
The Strategy& Global Innovation 1000 study analyzes spending at the world’s 1000 largest publicly listed corporate R&D spenders and is now in its 13th year. Key findings:
- Amazon is the largest spender on R&D in the Global Innovation 1000 study, the first time the top spender is a high-tech firm. All top four spenders are high tech companies.
- Overall, software and internet industry companies continue to increase their year-on-year R&D spending, and the analysis shows that by 2018, healthcare companies will surpass computing and electronics to become the largest industry in terms of R&D spending – the first time in 12 years of analysis.
- Overall, computing and electronics, healthcare and automotive are the top three industry sectors and represented 61.3 percent of global R&D spending in 2017.
- Alphabet, Amazon, GE, IBM and Microsoft all increased their ranking in the 10 most innovative companies list, according to a global survey of R&D executives
- R&D spending by companies based in China declined for the first time in the study, it increased in Japan for first time in 4 years, and continued to grow moderately in North America.
Other key bullet points from survey
- In 2016, worldwide R&D spending among the world’s 1000 largest corporate R&D spenders increased 0.04 percent in 2016 to $680 billion.
- R&D intensity – the measure of R&D spending relative to sales – hit an all-time study high of 4.5 percent: a rise of 6 percent year on year amongst the world’s top 1000 R&D spenders.
- Companies that deployed 60 percent or more of their R&D spending outside their headquarters country earned a premium of 30 percent on operating margin and return on assets, and 20 percent on growth in operating income over their more domestically focused competitors.
- Uncertainty in economic policy may also be contributing to an unprecedented 19 percent drop in high alignment between innovation and business strategies within companies, making companies cautious about how to plan for their innovation strategy in the short and medium term.
- The study finds that companies ranked in the list of top ten most innovative companies outperform the top ten R&D spenders on financial metrics including growth, EBITDA, and market capitalization.
- China’s corporate R&D spending had experienced double-digit growth rates for many years, but in 2017 the country saw a 3.3 percent decline in corporate R&D spending for the first time in the study. 80 percent of China’s R&D spend in 2015 was performed by companies headquartered in other countries. The combination of these trends for China makes the country vulnerable to potential disruptions of R&D investment coming from abroad.