Historical data show that aggregate R&D spending moves in concert with a country’s GDP. This suggests the likelihood that the economic downturn will be reflected in R&D expenditure data. OECD analysis of the period from 1982 to 2007 found that variations in GERD are generally larger than cyclical movements in GDP, and that the strength of the response to business cycles differs quite substantially across countries (OECD, 2009e, p. 26).
For example, the United Kingdom’s total R&D expenditure has exhibited low average Figure 1.8. Cross-funding of R&D
Government-financed R&D1 in business, 1998 and 2008
As a percentage of R&D performed in the business sector
Business-funded R&D in the higher education and government sectors, 1998 and 2008
As a percentage of R&D performed in these sectors (combined)
1. This measures direct transfers of resources to undertake R&D and does not include provisions such as tax concessions or exemptions, nor R&D bonus payments.
Source: OECD, Main Science and Technology Indicators (May 2010).
N o t e : I t a l y : o n l y g ov e r n m e n t s e c t o r f o r 1 9 9 8 . L uxe mbo urg: o nly gove rnme nt secto r fo r 200 0.
Switzerland: only higher education sector.
Source:OECD, R&D Database (June 2010).
1 2 http://dx.doi.org/10.1787/888932332740
0 10 20 30
%
43% (1998) 56% (2008)
0 5 10 15 20 25
%
2008 1998
Switzerland (2000, 2004) Canada Netherlands (2007) Denmark Portugal (2007) Finland (2007) Iceland Ireland Greece (1999, 2005) Slovenia Belgium (2007) Korea (2007) United Kingdom Italy United States France Slovak Republic Czech Republic Spain (2007) Russian Federation South Africa (2001, 2006)
Poland (2007) Austria (2007) Turkey (2007) Hungary (2007) New Zealand (1999, 2007) Norway (1999, 2007) OECD (2007)
Mexico (2007)
Singapore (2007) China (2000, 2007) Argentina (2007) Germany (2007) Israel (2007) Sweden (1999, 2007) Luxembourg (2000, 2007) Australia (2006)
Japan (2007)
Singapore Japan Portugal (2007) United States Ireland France Poland United Kingdom OECD Czech Republic Switzerland Korea Canada Finland Romania Slovak Republic Iceland Slovenia Hungary China (2000, 2008) Turkey Russian Federation
Germany (2007)
New Zealand (1999, 2007) Belgium (2007) South Africa (2001, 2007) Netherlands (2007)
Israel (2006) Australia (2006) Spain (2007)
Greece (1999, 2005) Austria (2007) Norway (1999, 2007)
Sweden (1999, 2008) Italy (2007)
Luxembourg (2000, 2007) Mexico (2000, 2007) Chile (2004) Denmark (1999, 2008) Argentina (2007)
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responsiveness to the business cycle since the early 1980s, with a 1% change in GDP associated with a change in R&D of less than 0.5%. For the United States, Japan and Denmark, R&D expenditures moved nearly in proportion to changes in GDP, while at the top of the range, Sweden, Spain, Poland, the Slovak Republic and Hungary saw variations in GDP matched by more than twice times that variation in R&D.
The previous section found that growth in GERD for the OECD area slowed in 2008, as did growth in BERD, although with important differences across countries. For instance, consistent with the MSTI data presented earlier, Battelle noted that R&D spending in the United States in 2008 had held up despite the onset of the recession, as budgets were already established and outlooks were still optimistic. In the United Kingdom, the Department for Business, Innovation and Skills (2010) found that R&D investment by the top 1 000 UK companies increased by 9.2% in 2008, with the top 46 spenders increasing their R&D investment by over 11%; however, this contrasts with an overall drop in real business expenditure on R&D of –1.2% for the United Kingdom, as shown in MSTI data.
Initial cross-country evidence from 2009 suggests that the financial crisis and economic downturn have had an impact on firms’ expenditures on innovation. A survey of European firms, conducted in April 2009, found that enterprises were two to three times more likely to have adopted a “defensive” (innovation cost-cutting) strategy over an
“offensive” (innovation expenditure-increasing) strategy in response to the economic downturn, although there were important country variations (EC, 2009a). Overall, 22% of firms had decreased their innovation expenditures in the previous six months as a direct result of the economic downturn, while 9% had increased their innovation budget. Looking ahead, 28% of enterprises expected their 2009 innovation expenditures to be lower than in 2008; between 2006 and 2008 only 9% indicated a decreasing budget. Firms in countries that are considered to be “catching up” in innovative activity fared particularly badly (Box 1.3). A number of leading US companies also made substantial reductions in their R&D expenditures over the first three quarters of 2009, including: Microsoft and IBM (in the software/IT/Internet sector); Intel, Motorola and Texas Instruments (in the electronics/
Box 1.3. Innovation and the crisis – initial firm-level analysis
The Innobarometer 2009 survey was conducted in April 2009 in the 27 member states of the EU and in Norway and Switzerland (EC, 2009a). Its topic was “Strategic trends in innovation 2006-2008” and it included some questions aimed at understanding the initial effects of the economic downturn. Over 5 000 enterprises with 20 or more employees were surveyed, of which 92% had some innovation activity.
The survey revealed that 24% of the enterprises for which innovation was a primary source of income reported a decrease in innovation expenditures in the previous six months; 20% of firms for which innovation was a significant source of income did the same. Firms in countries considered as “catching up” were much more likely to have decreased expenditure, with 29% of firms doing so, compared to 16% of firms from countries considered “innovation leaders”.* Overall, enterprises were two to three times more likely to have adopted a “defensive” (or innovation cost-cutting) strategy over an
“offensive” (or innovation expenditure-increasing) strategy in response to the economic downturn, although the gap was smaller for firms in high- and medium-high technology sectors, knowledge-intensive service sectors, countries considered innovation leaders, and firms with innovation as a significant source of income.
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computer hardware sector); Pfizer and Johnson&Johnson (in the biopharmaceuticals sector); and Caterpillar and DuPont (in the advanced technology/manufacturing sector) (Battelle and R&D Magazine 2009). Data from the US Securities and Exchange Commission also show a reduction of R&D in the first quarter of 2009, although with a small increase in the second (OECD, 2009e, p. 24).
Estimates by Battelle and R&D Magazine (2009) suggested that total world R&D investment for 2009 would be almost 1% lower than in 2008, measured in current USD PPP.
This overall figure masks substantial differences among countries. Asia was expected to experience a 3.7% increase in R&D spending in 2009 (with India increasing by 5% and China by 20%); the United States and other Americas economies, Japan and Europe were estimated to drop by more than 2%, 5.5% and 4%, respectively. As such, the share of global R&D spending accounted for by Asia was expected to rise from 32% to 33.5%, with China increasing its share from 9.1% to 11.1% and India picking up a small increase from 2.4% to 2.5%. The drop in investment in Europe, at least, may be driven mostly by private spending, with a survey of 27 EU member states indicating that 15 countries increased their public R&D budgets from 2008 to 2009, while six reduced theirs (Mega, 2010). Several states emphasised the role of EU structural funds in maintaining public R&D during the crisis.
Box 1.3. Innovation and the crisis – initial firm-level analysis (cont.) Using the firm micro-data to analyse the 4 195 innovative firms in the survey, Kanerva and Hollanders (2009) highlighted the influence of various firm characteristics on decisions to reduce innovation expenditures. In particular, they found that firms in medium-high innovation-intensive sectors were more likely to have decreased (and to expect to decrease) their expenditures on innovation than those in other sectors. Firms with medium innovation intensities (represented by turnover spent on innovation) were also more likely to reduce expenditures. Perhaps unsurprisingly, firms that were already cutting expenditures prior to the crisis were more likely to continue this pattern. Firms in catching-up countries were more likely to have decreased expenditures in the previous six months, while firms in “follower” and “moderate innovator” countries were more likely to expect to decrease future spending. Kanerva and Hollanders suggested that these results could signal a slowdown and even a reversal of the observed convergence process in innovation performance in the EU.
Firms for which innovative products and services accounted for a larger share of sales were more likely to maintain their investments in innovation activities. Firms with broader innovation strategies, particularly those involving users, were also less likely to reduce their expenditures than other firms. The results for internationalisation were mixed; firms that viewed export markets as their greatest innovation opportunity were more likely to have cut innovation expenditures in the previous six months, but were less likely to expect to cut them in the future. Firms operating on international markets were more likely to expect to cut future expenditures than firms operating solely domestically. There was weak evidence that innovation resulting from R&D activities was less affected by the downturn than innovation from non-R&D activities. The size of firms had no notable effect on actual or expected innovation expenditures, nor did the type of innovator (product, process, etc.).
* The European Innovation Scoreboard classifies Bulgaria, Hungary, Latvia, Lithuania, Malta, Poland, Romania and Slovakia as catching-up countries and the innovation leaders as Denmark, Finland, Germany, Sweden, Switzerland and the United Kingdom.
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Financing is an important constraint on private R&D spending during economic downturns and early evidence suggests this may also be true of the current recession. A survey of innovative companies in Germany, published in September 2009, found that 16%
were unable to obtain any financial support for their innovation projects and a further 14%
reported worsened conditions, with small and medium-sized enterprises (SMEs) faring worse than larger firms (DIHK, 2009). However, 53% evaluated their access to external financing as unchanged, and a further 17% believed it had improved. Venture capital can be a major source of funds for new innovative firms. In 2008, firms in the United States and the United Kingdom received 58% of total venture capital investments in OECD countries, although venture capital intensities were highest in Finland (0.24% of GDP) and Sweden (0.21% of GDP).8 Venture capital is particularly sensitive to recessions. Data from 2008 and the first half of 2009 for the United States already showed strong declines in response to the economic downturn (OECD, 2009e, p. 22). More recent data from the United States reveal that 2009 had the lowest level of dollar investment by venture capitalists since 1997, with a 37% decrease in dollars and a 30% decrease in deal volume from 2008 (PricewaterhouseCoopers and National Venture Capital Association, 2010). From a high of USD 8 billion invested in the final quarter of 2007, investment plunged to USD 3.3 billion in the first quarter of 2009. Except for the category of Networking and equipment, every industry grouping had double-digit drops for the year, and the distribution of investment changed, with biotechnology overtaking software and industrial/energy to receive the largest amount. Nevertheless, the final quarter of 2009 saw a pick-up in the number of first-time and early-stage deals completed, and 11 of 17 industry sectors had funding increases. Investment reached just over USD 5 billion in the quarter, leading the authors to suggest a potential uptick in investment for 2010.
Looking ahead
As economies begin to return to growth, R&D investment is expected to follow. The annual funding forecast of Battelle and R&D Magazine (2009) suggested that overall global R&D (measured in current USD PPP) would increase 4% in 2010, with China and India driving a 7.5% increase in Asian R&D, the United States experiencing a 3.2% increase, and the European economies lagging with growth of 0.5%. A survey of EU member states found that 16 planned to increase their public R&D investment over 2010, while only three foresaw decreases (Mega, 2010). However, the Battelle predictions suggested that the shares in global R&D spending of the United States and other Americas economies, Japan and Europe would fall from 2009 to 2010, with China increasing its share to 12.2% of the world total, and India reaching 2.9%. Battelle interpreted these 2010 forecasts as a continuation of a trend seen since 2005, in which both the Americas (the United States, Canada, Mexico, Brazil and Argentina) and the European economies were falling behind R&D spending in Asian countries (although it also noted that some of this was by European and American industrial firms).
At the same time, there are clear uncertainties around the size of the expected improvements. For instance, Battelle and R&D Magazine (2009) viewed the trade deficit, fiscal deficits and limited state revenues for state government funding of R&D as ongoing threats to R&D investment in the United States. Firms agreed: a survey conducted in mid- to-late 2009 in the United States found that the federal deficit, the global recession, corporate outsourcing to foreign firms and stock market volatility were most frequently mentioned as negatively affecting near-term R&D performance in the United States
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(Battelle and R&D Magazine, 2009). On the positive side, renewal of the R&D tax credit, global climate change, federal science and technology (S&T) policies and American investments in STEM (science, technology, engineering and mathematics) education were viewed as strengthening potential R&D performance. Ongoing uncertainty about the future is also reflected in the rapidly changing sentiment reported in McKinsey’s Global Survey results; while the percentage of respondents who said their firm would introduce new products or services in the next 12 months rose from 48% to 57% from February 2010 to April 2010, it then fell in June 2010 to 51%, reflecting heightened anxiety about consumer demand and economic volatility (McKinsey and Company, 2010a, 2010b).
To some extent, growth in future R&D will likely follow the patterns set prior to the financial crisis and recession. An analysis of the “clean-tech” sector in the United States, for example, suggested that, despite a plunge of 84% in venture capital funding at the start of 2009 (driven mainly by a collapse of funding for solar energy companies), the fundamentals behind growth in the sector remained strong (PricewaterhouseCoopers, 2009). The analysis posited that public and private initiatives to reduce energy consumption, dependence on foreign oil and greenhouse gas emissions would especially benefit companies focused on efficiency and smart grids. Analysis by the OECD (2009e, pp. 55-73) of citations of scientific articles pointed to a number of research areas that have been particularly active in recent years; given the longer-term nature of some scientific research, these areas might be expected to continue to feature prominently in the near future. In the environmental sciences, active research areas included climate change, air and chemical pollutants, and biodiversity, while in the biosciences, brain research, genomics, regenerative medicine and plant science research were strong. In nanotechnology, the research areas chemical synthesis, superconductivity and quantum computing, and nanomaterials and devices were prominent, while nanotechnology patents in nanomaterials and electronic devices and optoelectronics grew particularly strongly from 1999-2001 to 2004-06. The forecasts of Battelle and R&D Magazine saw strong R&D growth in the United States being driven by continued competitive pressures from globalisation and advances in a set of overlapping technologies, materials and processes including alternative energy technologies, biotechnology, infrastructure enhancements, transport, accelerating information and communication technologies (ICTs), medical devices and procedures, sustainability, agriculture and climate change implications.
Government budget allocations and recent trends in industry financing give some indication of the targets of future spending plans. For instance, the UK government announced in February 2010 that GBP 200 million of the UK Innovation Investment Fund would be used to benefit life sciences and digital and advanced manufacturing businesses, thereby adding to the GBP 125 million invested in low-carbon and clean-tech sectors. In Australia, the government is co-financing a Green Car Innovation Fund (see Chapter 2 for further examples). Battelle and R&D Magazine (2009) suggested that stem cells, personalised medicine and nanotechnology would continue to be supported in US research labs over the next five to seven years and would drive expanded research funding. They noted that following a lifting of restrictions, 13 human embryonic stem cell lines were approved for research studies in December 2009 and 96 more are under review and expected to be approved in 2010. Academic research involving the human genome is now being picked up by pharmaceutical and diagnostics companies, and nanotechnology research holds promise for many industries. Indeed, data on venture capital funding for the life sciences (which encompasses the biotechnology and medical devices and
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equipment industries) showed that it experienced a smaller fall in funding in 2009 than the average across all sectors, and commentators suggested that the sector’s growth opportunities would stimulate a return of funding flows in 2010 and beyond (PricewaterhouseCoopers, 2010).
Looking further ahead, what emerging trends might governments need to consider in their R&D plans? In discussions of future orientations for STI policy, Daheim (2009) pointed to a number of “megatrends” that are likely to stimulate new markets and innovations and change the way people communicate, work and live. Unsurprisingly, the issues of climate change, resource scarcity and the search for clean and efficient energy featured prominently in the analysis. But Daheim also highlighted demographic change and urbanisation, with ageing populations in advanced economies potentially driving increased migration and the strong growth of megacities in emerging markets calling for new infrastructure solutions. Also noted was the process of globalisation at the level of socio-culture and questions about the ethical limits to innovation arising from ongoing technology convergence. These megatrends challenge policy makers to think about the desired pathway for development and to design appropriate policies. In other trends, the continuing growth in emerging-market consumers not only challenges companies to adapt products to different preferences and budget constraints; it also challenges them to develop products designed specifically for emerging-market needs and to market them in new ways (The Economist, 2010). The results of such “frugal innovation” may also be valuable for developed countries (better value-for-money health care was one example described by The Economist), and raises the importance of ensuring that policy settings allow two-way flows of knowledge across borders and enable experimentation with new ideas from emerging markets.
Information about specific emergent technologies may also be of use to governments seeking to better direct their research funding priorities. For instance, in terms of maintaining a leading edge worldwide in science and engineering (S&E) research, the National Science Board (2010a) believed that US research agencies needed to ensure adequate support for “transformative research” which yields revolutionary advances through the application of radically different approaches or interpretations and results in new paradigms or scientific fields. However, it is difficult to identify such technologies.
Foresight exercises yield some suggestions on emerging fields of research and predict when certain technologies or advances may reach the marketplace (Box 1.4). Such future- oriented technology analysis (which may also encompass technology forecasting and assessment) can be a useful tool for informing policy, achieving greater participation in policy making and supporting policy definition (Haegeman et al., 2010). Very broad scans (or “horizon scans”), which systematically examine potential future problems, threats,
Box 1.4. Emerging areas of science, technology and innovation It is not a simple task to predict what the next big breakthrough areas of science, technology and innovation will be. Foresight exercises seek to give a flavour of the emerging environment and can give some indication of the direction of change. The following sample of ideas is drawn from a selection of future-oriented analyses, as an example of what might be “coming down the pipeline” in the science and technology arena.
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Box 1.4. Emerging areas of science, technology and innovation (cont.) Biotechnologies in agriculture and natural resources: Arundel and Sawaya (2009) predicted that several novel agronomic and product quality traits (e.g.stress tolerance) will come on the market for a number of crops by 2015. Almost all varieties of large market crops (e.g.cotton and wheat) are likely to be developed using marker-assisted selection (MAS – a non-genetic modification [GM] biotechnology), while GM varieties of barley, peanuts, peas and sugarcane will also appear. Livestock for dairy and meat will continue to be improved via non-GM techniques, in particular, by applying MAS to breeding programmes. Cloning for meat production may occur by 2015 in non-OECD countries. Public attitudes are extremely important for the future direction of biotechnology applications, and opposition could lead firms to limit investment in GM to feed and industrial feedstock crops and plants such as trees or grasses. Another study suggested that the further adoption of “biotech crops”
globally will be catalysed by deployment of biotech rice as a crop, as rice is a staple food for half of the world’s population, including many of the poor (James, 2009). Incorporating drought tolerance as a trait will also be a strong driver (agriculture uses over 70% of the world’s fresh water). A number of rice crops are being developed, and drought-tolerant maize is expected to be deployed in the United States in 2012 and in Sub-Saharan Africa in 2017. Looking out to 2030, the OECD (2009f) foresaw a high probability of more diagnostics for genetic traits and diseases of livestock, fish and shellfish, and of more GM varieties of major crops and trees to improve industrial processing and conversion yields.
Biotechnologies in human health: Arundel et al. (2009) foresaw biotechnology being used in the discovery, development, manufacturing and/or prescribing of nearly all new drugs by 2015. While there is no evidence of an imminent surge in biotechnology drugs, evaluations show that biopharmaceuticals offer greater therapeutic value than other pharmaceuticals. There is a very strong biotechnology pipeline for experimental therapies (e.g.cell and tissue engineering), but the use of biotechnology in functional foods and nutraceuticals will remain minimal. Health-care delivery will be improved via the development of predictive and preventive medicine, drawing on the continued creation, population and maintenance of health databases. Importantly, however, tapping the full benefits of such information will require changes to health systems and policies. The OECD (2009f) considered that by 2030 there would be extensive screening for multiple genetic risk factors for common diseases in which genetics is a contributing cause, and improved drug delivery systems from convergence between biotechnology and nanotechnology.
“General purpose” nanotechnology: Nanotechnology may become the next general purpose technology, developing rapidly, offering significant scope for improvements over existing technologies, having a wide variety of uses in a wide number of application areas and industries, and both generating and depending on the development of a range of complementary technologies and innovations (Palmberg et al., 2009). According to Battelle and Foresight Nanotech Institute (2007), the long-term vision of nanotechnologists is the fabrication of a wider range of materials and products with atomic precision. This could improve high-performance technologies of all kinds, and in the process could lead to new capabilities in atomically precise manufacturing. Atomically precise nano-systems and manufacturing processes have wide application potential, with products including targeted agents for cancer therapy, “smart” materials and efficient high-power-density fuel cells. Early applications are likely to come in sensors, computer devices, catalysts and therapeutic agents, but 10 to 20 years ahead, potential applications could include artificial organ systems and removal of greenhouse gases from the atmosphere.