05.09.2016 - Natural Sciences Sector

The G20 accounts for 92% of global spending on research

© Shutterstock.com / The G20 is home to two-thirds of the global population and nine-tenths of global research.

The world’s 20 biggest economies are meeting in the Chinese city of Huangzou on 4 and 5 September. They account for two-thirds (64%) of the global population but as much as 80% of GDP and 92% of spending on research and development (R&D) worldwide, according to the UNESCO Science Report.

When it comes to private knowledge creation, the domination is even stronger: 94% of patents granted by the US Patent and Trademark Office stem from G20 countries.

Although the number of researchers has increased worldwide since 2009, the G20’s share has shrunk by less than one percentage point. Of the 7.76 million researchers worldwide, 6.74 million live in G20 countries, equivalent to 87% of the total.

The G20 continues to dominate both GDP and research. However, within the G20, the playing field has levelled out somewhat, with China having increased its share of research spending by 42% to 19.6% of the total and the Republic of Korea by 22% to 4.4%. This has caused the world shares of many high-income G20 countries to contract, as in Australia, Canada, France, Germany, Japan, Italy, Russian Federation, the UK and USA.

The progression of GDP over this period reflects a similar trend. Whereas high-income G20 countries saw their world shares of GDP contract between 2009 and 2013, China’s share grew from 13.4% to 16.1% of the total.

Overall, research spending progressed faster than GDP in the years following the global financial crisis of 2008–2009. A drop in public spending on research in high-income countries as a result of austerity budgets was compensated by sustained business spending.

Meanwhile, developing countries with strong primary industries, such as Argentina, Ethiopia, Kenya, Mali and Mexico, were able to use strong growth fuelled by the commodities boom to boost their own level of public commitment to research. A number of emerging economies also increased their research spending over this period, such as Malaysia and Turkey.

All five BRICS countries are G20 members. They experienced contrasting trends between 2009 and 2013. In the Russian Federation, where technology-based start-ups remain uncommon, government funding of civil-purpose R&D rose steadily but industrial investment remained modest, despite government efforts to stimulate business innovation. In China, public and business funding of R&D rose in tandem, whereas, in South Africa, the rise in public spending on R&D could not compensate for the sharp drop in private-sector R&D. In Brazil and India, the situation was reversed, with business spending rising faster than government commitment to R&D. However, the UNESCO Science Report observed the 2008 crisis had had a negative impact on innovation in Brazil, with all Brazilian firms surveyed in 2013 reporting a drop in this activity since 2008. The report went on to predict that ‘this trend will most likely affect [research] spending if the Brazilian economic slowdown persists’. A year later, both Brazil and the Russian Federation are still in recession.

Europe, USA and Japan still lead global research

The European Union (EU), Japan and USA still dominate private knowledge creation. They hold eight out of ten (83%) triadic patents – those filed with the EU, Japan and US patent offices by the same applicant for the same invention. This said, China and the Republic of Korea have made great strides in the past decade. Taken together, they now account for 8.3% of triadic patents and the Republic of Korea alone for 5.5%. In both countries, the business sector funds three-quarters of research spending. Although China has half (2.09% of GDP) the research intensity of the Republic of Korea (4.15% of GDP), Chinese companies now account for one-fifth of global business spending on R&D, compared to just 5% in 2001.

According to the UNESCO Science Report, EU businesses tend to concentrate more heavily on R&D of medium-to-low and low intensity, in comparison to their principal competitors, the USA and Japan. Moreover, although EU-based companies account for 30% of total R&D spending by the world’s top 2 500 companies, only two EU-based companies figure in the top ten, both of them German and both in the automotive sector,Volkswagen and Daimler. The automotive sector represents one-quarter of R&D spending by EU companies.

The EU is largely absent from the arena of internet-based companies active in new and emerging forms of innovation. Eleven of the 15 largest public internet companies are US-based and the remainder are Chinese. ‘The EU’s attempts to replicate a Silicon Valley-type experience have not lived up to expectations’, observes the report. ‘The principal EU giants specializing in hardware within the digital economy (Siemens, Ericsson, Nokia) have even lost a lot of ground in the past decade in global R&D rankings. Only the German-based software and IT services company SAP has managed to join the global top 50 R&D performers’.

‘Business R&D performance in the EU has also been weighed down by the disappointing growth of R&D in sectors such as pharmaceuticals and biotechnology (0.9 % R&D growth in 2013) or technology hardware and equipment (-5.4%), which are typically R&D-intensive. Whereas the EU is almost on a par with the USA in pharmaceuticals, it trails the USA in the area of biotechnology’.

The UNESCO Science Report concludes that ‘Europe has been a major producer of new knowledge but it has performed less well in turning new ideas into commercial successful products and processes. Science and innovation face a more fragmented market than large economies comprised of only one nation state, such as the USA or Japan. The EU thus needs a common research policy to avoid duplicating research efforts in different member states’.

European companies currently need to file for patent protection in all 28 member states. The unitary patent package adopted by 25 EU members in 2013 (all but Croatia, Italy and Spain) is expected to slash procedural fees and translation costs by 85%. The unitary patent package will only apply, however, once the Agreement on a Unified Patent Court enters into force. As of 3 September 2016, only 10 of the requisite 13 countries had ratified this agreement.

One policy concern in Japan has been the transfer of technology abroad by Japanese businesses, coupled with falling foreign investment in Japan. A law enacted in November 2012 provides incentives for global corporations to relocate their research centres and Asian branches to Japan. The lower corporate tax rates, combined with a sharp depreciation of the yen and lower oil prices, have also persuaded many Japanese manufacturers to bring their factories back to Japan.

Research spending down in some G20 countries, despite commodities boom

The level of research spending has actually dropped in three high-income G20 countries which enjoyed rapid economic growth during the commodities boom, thanks largely to exports of fossil fuels and minerals. They are Australia, Canada and the Russian Federation.

In Australia, the boom in iron ore and coal has fuelled the country’s economic success for decades. The mining sector also concentrates a sizeable share of the research budget: it accounted for 22% of business expenditure on research in 2011, equivalent to 13% of the country’s total research spending, according to the UNESCO Science Report. This sector accounted for 59% of Australian exports in 2013. Reduced demand for iron ore since 2011 from China and India, in particular, has led to cuts in spending on research both in the mining sector and in public funding for science overall.

In Canada, the share of energy-related products (oil and gas) in exports rose from 13% to over 25% between 2002 and 2012. Over the same period, Canada’s research intensity fell from 2.0% to 1.6% of GDP, particularly after 2009 when ‘federal in-house R&D became a casualty of the government’s determination to balance the budget’.

Since the beginning of the year, both the Australian and Canadian governments have made moves to reduce their dependence on fossil fuel technologies.

In the Russian Federation, ‘paradoxically, the rapid economic growth fuelled by the commodities boom between 2000 and 2008 actually weakened the motivation of enterprises to modernize and innovate… This manifested itself in a boom in imports of advanced technologies and a growing technological dependence on developed countries in certain areas, such as pharmaceuticals and high-tech medical equipment’, observed the report. In May 2014, the Russian president called for a widening of import-substitution programmes to counter this trend.

Although federal budgetary allocations for civil-purpose R&D rose from 63 to 81 billion rubles (in constant 2000 prices) between 2009 and 2013, research intensity actually contracted over the same period, from 1.25% to 1.12% of GDP. ‘The low share of industry-financed R&D is a perennial concern’, observes the report. Industry performs the bulk of research (60%) but finances just 28% (2013). Moreover, this is down from 33% in 2000. Innovation is largely confined to the domestic market, where businesses show only a ‘tepid interest in green growth’, notes the report. Even when companies do invent environment-friendly technologies, ‘this gives them virtually no competitive advantage in the domestic market’. One of the targets fixed by presidential decree in 2012 is to carry the national research effort to 1.77% of GDP by 2015. Another is for the share of high-tech industries in GDP to increase by 130% by 2018.

Source: UNESCO Science Report: towards 2030 (published in 2015); see, in particular, the chapters on Brazil, Canada, China, the European Union, Russian Federation and USA.

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