R&D and Economic Growth
All the economies seek to become knowledge-intensive economies. These economies provide competitive advantages and generate employment of quality. The best indicator for measuring this intensity of knowledge in the economies is the percentage of GDP that the country devotes to R&D. Remember that Europe has set the target of 3% R&D investment in relation to GDP in 2020. In addition, today the private sector is expected to assume a large part of a country’s research, desirably around 2/3 parts. Some days ago I had a conversation on this subject and the considerations that I made were the following:
- It is quite easy to influence the % of R&D performed by the public sector: The “only” think to do is to allocate more money to public research, to the research carried out in universities, technology centers, research centers, hospitals, etc. (and also making research groups more competitive in accessing international public funding).
- It is not so easy to influence the % of R&D performed by the private sector. In this area, an increase in R&D can be achieved in three different ways:
1) Attracting R&D intensive multinationals
2) Making the companies of the territory more active in R&D
3) Creating new R&D intensive companies
Attracting R&D intensive multinationals
This first point is highly effective. Suppose of a country or a region (for example, Catalonia) with a GDP of 200,000 million euros. A company that has a R&D center with a budget of 200 million euros in that country ends up determining 0.1% of the GDP of that country or region. A budget of 200 million is high but not extraordinary. Remember that the most active company in the world in R&D is Volkswagen, with an annual budget of 15,000 million dollars. Therefore, attracting large-scale R&D intensive multinationals is a very effective strategy for increasing a country’s private R&D expenditure.
Making the companies of the territory more active in R&D
The second way to increase private R&D investment is to encourage companies in the country or region to do more R&D. But…. remember that not all companies need R&D to be competitive. How do we know which ones need R&D and which do not? It is not a matter of size or age. It is a question of what are the competitiveness factors of the sector in which it operates. A universal way of ordering industries based on their dedication to R&D is as follows:
- High R&D intensity sectors (R&D intensity above 5%): Pharmaceuticals & Biotechnology; Health Care Equipment & Services; Technology Hardware & Equipment; Software & Computer Services.
- Medium-high R&D intensity sectors (2% – 5%): Electronics & Electrical Equipment; Automobiles & Parts; Aerospace & Defense; Industrial Engineering & Machinery; Chemicals; Personal Goods; Household Goods; General Industrials; Support Services.
- Medium-low R&D intensity sectors (1% – 2%): Food Producers; Beverages; Travel & Leisure; Media; Oil Equipment; Electricity; Fixed line Telecommunications.
- Low R&D intensity sectors (<1%): Oil & Gas Producers; Industrial Metals; Construction & Materials; Food & Drug Retailers; Transportation; Mining; Tobacco.
I want to remark the following:
1) It is very difficult to achieve a significant increase in R&D in sectors with low or medium technological content, for example in the sectors of transport, mining, tobacco or metal. Because is it complicated? Because R&D is not one of the variables that most influence the competitiveness of these sectors.
2) It is more feasible to increase R&D in sectors of medium or high technological content, for example in the pharmaceutical or electronic sectors. This is so because in these cases, R&D intensification will make these companies more competitive.
Therefore, if a country or region wants to increase its private R&D investment in relation to GDP, it should act in sectors with medium or high technological content.
Creation of new companies
This is another highly effective route. The aim is to encourage the creation of knowledge-intensive, R&D intensive companies. I make a brief reference to the Catalan pharmaceutical and biotechnology sector. The Bioregion of Catalonia is made up of 871 companies:
- 51 traditional pharmaceutical companies (the locals and multinationals installed here).
- And in front of them, 429 startups of the sector (249 biotech companies, 89 of medical technologies, 91 healthcare)
- The rest are suppliers and engineering, professional services and consulting and investors.
The 429 startups are highly R&D intensive and according to Luis Ruiz, Catalonia’s biotechs have the same number of new therapeutic targets in their pipeline as traditional Catalan pharmaceuticals (without considering the multinationals installed here). In short, the creation of new companies intensive in knowledge and technology is a great strategy to increase the weight of private R&D.
The 3% target marked by Europe
The advantage of setting a target of this type is that the process to reach it is “mathematical”. Let’s look at an assumed case: A country or a region that has a GDP of 200,000 million euros and currently devotes 1.7% to R&D. It aims to reach 3% in 5 years.
Of this 1.3% increase (corresponding to 2,600 million euros), it is fixed that 900 million will correspond to the public part, with annual contributions that will increase by 180 million annually in the next 5 years.
The rest (1.7 billion) is due to the private sector. What strategy is defined to have that extra part of private R&D in 5 years? A combination of initiatives mentioned above. For example:
- Attracting 5 multinationals in the next 5 years (one per year) with an annual minimum R&D in the country of 200 million euros each
- Increasing by 500 million per year in 5 years the R&D performed by companies currently existing in the country, distributed in two groups:
- 100 million in sectors of medium and low R&D intensity: Food, beverages, metal, construction, transport, mining, etc.
- 400 million in medium and high R&D intensity sectors (above 2%): Pharmaceutical, biotechnology, Software and computer services, technological equipment, Electrical and electronic equipment, automotive, aerospace, chemicals, machinery , etc.
- Creating and growing 300 new technology-based companies so that within five years these startups and spinoffs will assume 200 million annual investment in R&D.