2002 a Mixed Year for R&D Spending

- Summary -

Global Emerging Technology Institute

R&D expenditures by industrial firms for 2002 on a global scale experienced significant changes in accordance with the state of the global economy. Though spending in certain sectors, like software, increased, it decreased in other areas such as telecommunications and semiconductors. The top R&D spenders include automobile companies such as Ford, which spends the most at $7.4 billion, pharmaceutical companies like Bristol-Myers Squibb ($5 billion) and electronics firms, like Siemens ($6 billion). The sharpest decrease naturally occurred in the telecoms sector. The cuts were deep since 2001 by firms in Silicon Valley, a key technology hub, located in a state that boasts the world's fourth or fifth largest economy. Though spending in the semiconductor industry fell, certain key firms managed to implement modest cutbacks in their budgets that should not hamper innovation. Restructuring due to the prolonged slump in the IT industry will certainly lead to certain firms gaining a competitive edge by continuing to make key investments in certain emerging technologies. The products that should command the highest margins in the future are those at the leading edge of design and performance, which result from possessing the best manufacturing technology. This results only from a long-term devotion to supporting the objectives of a firm's R&D strategy.

The interesting aspect about R&D spending in 2002 was that though firms were forced to focus on enhancing existing technologies that cater to sizeable commercial markets, a great deal also went into more speculative and emerging or "disruptive" technologies. These technologies, such as nanotechnology, promise to create entirely new industries and will in the both short and long term greatly enhance the productivity of existing technologies. It is obvious that a great deal of the R&D spending in this area sought to promote the technology as an enabler, using it to improve existing process technologies. Along with nanotech, firms actively invested in both large (automobile industry) and miniature (electronics, medtech, aerospace) fuel cell technologies. In this area, nanotech was also used as an enabling technology, paired with a more developed and more commercialized technology (MEMS). Nanotech research expenditures were fairly top-heavy in the materials area, since many expected advances in micro- and nano-electronics are very dependant on the development of new materials, hence a strong focus on areas such as "nano-ceramics." Though the economic climate placed a great deal of pressure on firms to focus on developing technologies that could immediately contribute to earnings growth, many felt it was an opportune time to go beyond that and support riskier projects that sought to enhance the likelihood of breakthroughs in emerging and disruptive technologies. Firms that seek to make sure that a certain percentage of their R&D funding goes toward such technologies, while refraining from making serious spending cuts in general, should gain a great deal of competitive comparative advantage when the market recovers.

The United States and Japan lead the world in corporate R&D expenditures. Though the U.S. leads in total amount of R&D spending. R&D expenditures as a whole increased by over $50b during the 1990s to over $200b by 2000. Japan was the second highest, and was the largest in terms of R&D expenditures as a percentage of GDP. For the U.S., high R&D expenditures have led to U.S. firms commanding a large market share in key high-value added sectors such as the aerospace industry, computers, pharma, and the communications industries. However, a good share of U.S. patents have been awarded to foreign applicants, with Japan's share being by far the highest of any other country. The large R&D expenditure in the U.S. is in reality a "global" figure, considering that a good portion of the spending comes from the U.S. affiliates of foreign companies, with such activity increasing significantly during the 1990s. These expenditures more than doubled from 1994 through 1998 alone. R&D by U.S. foreign subsidiaries also increased. In 2002, the globalization of R&D trend continued with different parts of the world nurturing the development of particular emerging technology areas as both companies and governments made strong funding commitments.

Firms from the U.S. and Japan dominate the top ranks of global corporate R&D spending in key sectors where new technologies are actively invested in, from aerospace, to automotive, biotech, chemicals, computers, software, electronics, semiconductors and telecommunications. Though U.S. and Japanese firms dominate in R&D expenditures, there are a number of European firms, in particular German, British and French firms that also rank high on the list for both expenditures and innovation. Other countries, such as Taiwan, are planning large commitments in funding emerging technologies that will enhance current market competitiveness. It is clear that large R&D expenditures by the public and private sectors of these economies have led to enhanced competitiveness in certain sectors.

It can be expected that in difficult economic times, the economic winners will be the firms that maintain relatively high levels of capex and R&D funding. During the 1980s Japanese companies invested heavily during down cycles, and eventually gained market share as a result. It is the companies that can maintain high R&D investment levels during economic slowdowns that gain market share when a recovery occurs. Intel in the U.S. clearly is positioning itself for the next wave of economic growth. Intel's capital spending in 2001 was US$7.3 and then decreased to US$5.5 billion in 2002. However, R&D spending did not suffer that much in relative terms. Intel invested about US$3.8 billion in R&D on about US$34 billion of revenue in 2000, and about US$3.8 billion with about US$26 billion in revenue in 2001. Intel's revenue fell substantially since 2000 but R&D did not. Intel strives to keep its R&D budget at the very least flat. Historically, Intel's R&D spending has been flat only for one year, in 2001 when the firm experienced its largest fall in revenue.

Intel, like an increasing number of U.S. firms, is actively investing more into overseas R&D initiatives. For example, the firm invested heavily in R&D in Asia over the past year, including investments made in order to expand facilities on mainland China and in Taiwan. Japanese semiconductor firms will seek to match such investments, bolster their R&D competitiveness, increase innovation and reduce the traditionally heavy reliance on the production of dynamic RAMs and commodity products. Competing in these business areas has served as a drag on their R&D investment and has led to a great deal of restructuring and revisions to corporate planning.