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Power Shifts in Global R&D and Innovation: What They Mean for Firms in Life Science Businesses

Just as the global center of gravity in manufacturing has shifted east in the past two decades, a power shift is underway in science, technology, and innovation. This chapter discusses the emerging new order of global innovation in the life science business.
This chapter is from the book
  • "In the twenty-first century, citizens of the United States and Europe will consider themselves fortunate if they produce maybe one of every four or five major inventions."
  • —Don Tapscott and Anthony Williams1

The New Post-Crisis Economic Game: Emerging Economies Gain Advantage and Speed Up R&D Spending

This book is about the emerging new order of global innovation in the life science business. Just as the global center of gravity in manufacturing has shifted east in the past two decades, a power shift is underway in science, technology, and innovation. For most of the past several centuries, the West has dominated science and technology. We tend to forget, however, that, historically, Asian nations such as China have equaled, if not exceeded, Europe in many areas of invention and application of discoveries. Explorers such as Marco Polo were amazed by what they saw in China. In fact, until the industrial revolution in the West, the Middle Kingdom was technologically ahead of Europe in most fields. During the twenty-first century, we may well be witnessing a swing of the technology pendulum back in favor of China and other rapidly developing economic powers of Asia.

Yet most recently, two bastions of Western advantage have seemed to remain in place: research and development (R&D) and finance. However, the recent global economic crisis has shaken the foundations of Western preeminence in finance. Indeed, it has also shaken the foundations of our beliefs in the model of a capitalist economy based on free markets, a model that leading Asian nations regard as flawed. Similarly, Western science and technology remain strong, but many signs indicate that, in the crucial area of R&D—which ultimately underpins technology and innovation—the beginnings of a major shift away from Western dominance may be underway. The current economic crisis and the period of subdued economic growth in the West that follows may well speed up this development.

What accounts for this transformation? The last decade has seen a significant transformation in the economic and financial power of emerging economies. Most developing countries have run persistent external accounts surpluses, even as the United States has been running a deficit. A remarkable aspect of those surpluses has been a pickup in economic growth and trade. As a result, the emerging economies have become creditors to the United States, thus accumulating claims against the United States while simultaneously gaining an ability to influence markets around the world through the pricing of bonds, company shares, and currency exchange rates. As Mohamed El-Erian puts it, "Developing countries have shifted from operating in debtor regimes to creditor regimes."2 As El-Erian also observes, history suggests that the current mix in emerging economies of internal macroeconomic stability and high financial cushions acts as a strong catalyst for the development of internal financial markets.3 Thus, emerging economies will increasingly constitute a consequential and independent driver for growth in the world.

The growth strategies adopted by leading emerging economies have resulted in a rapid increase in their share of world trade; those economies are also increasingly moving to higher value-added goods. Emerging economy governments will have every incentive—as well as the means—to continue to increase spending on education and R&D, to broaden the number of citizens who can benefit from technological progress. This will allow larger groups to benefit from globalization and will enable those groups to reap the benefits of their countries' new technological capabilities and skills.

Experts warn that, in the post-crisis conditions, Western countries face the risk of stagflation, or an extended period of low growth combined with unemployment. Inflation could replace the deflationary pressures of the crisis conditions, as governments are tempted to monetize the huge piles of accumulated debt. As commodity prices move up and low-cost labor becomes less available, inflationary forces may develop at a time when mature Western economies face weak economic growth and weak productivity.

Furthermore, reports by such prestigious consultancies as Boston Consulting Group point out that, in forthcoming years, we can expect emerging Asia—led by fast-growing economies such as China, India, Singapore, and South Korea—to enjoy double the economic growth of the transatlantic West.4 An August 2009 article in The Economist notes that emerging Asia may enjoy annual growth rates of 7%–8% over the next five years, several times the rate of the rich world.5

Innovation, which is the commercial application of scientific inventions, will drive today's economies—and especially those of the future. Scientific discovery, in turn, depends on a complex set of factors, including national R&D systems, education, and technological infrastructure (especially information communication technologies, or ICT), as well as intangibles such as freedom of ideas and a strong culture of scientific rationalism. Those are the foundations of what has become known as the knowledge economy. Economists argue that the future wealth of nations will depend increasingly on the excellence of the workforce skills and the strength of institutions that underpin the innovation-based knowledge economy. Building innovation-based knowledge economies, as the experience of leaders such as Finland, Sweden, and South Korea shows, requires careful strategic planning built on a long-term vision; by themselves, markets will not suffice. Until about a decade ago, a challenge to Western R&D seemed very remote: Countries outside the triad of the United States, the European Union, and Japan lacked the resources to spend significantly on R&D. In both relative and absolute terms, their spending was small, and their scientific and innovation systems were not competitive with the West. Emerging economies were advised that it was more efficient for them to import technology than try to develop it themselves. Until recently, the only Asian nation that garnered significant investment in R&D from multinational companies was Japan.

The governments of leading Asian nations have been building plans for the future based on a mix of public and private-sector efforts. Strategies carefully designed by governments partnering with the private sector play a key role. The cited BCG report states that the big emerging economies are committed to investments in innovation: "They realize that innovation is the next battleground and they are aggressively fighting that battle now."6

The deep economic reforms undertaken over the past two decades in key emerging economies such as China and India have enabled a take-off toward sustained rapid economic growth. This growth has facilitated steady increases in the portion of gross domestic product (GDP) that can be allocated to science, education, and innovation. By the early twenty-first century, smaller emerging economies such as Taiwan, Singapore, and Korea, which had been pursuing accelerated economic growth strategies longer than India and China, have now matured economically enough that they can afford to spend significant resources on R&D. Today they are not just consumers, but are gradually becoming producers and exporters of technology as well.

Perhaps more important, a broad group of emerging economies—especially in Asia—have been concentrating on making drastic improvements in their innovation capabilities. Leading Asian economies are not leaving the development of their knowledge economies to market forces alone. They have launched sophisticated national catch-up strategies and have implemented many needed reforms in their science and education policies. Malaysia and Thailand are following the example of leaders such as South Korea, Taiwan, and Singapore, which today spend a higher percentage of their GDP on R&D and have better-educated workforces than many Western countries. But the emergence of giants China and India as major players in the global R&D effort will likely have the greatest impact on the West in the longer term. Other Asian nations are sure to follow their lead.

Just a decade ago, in 1999, the combined R&D spending of Asian countries was at about the same level as that of Europe at purchasing power parity (PPP) and well behind that of the United States (see Figure 1-1). Since that time, Western spending has been growing slowly (especially in the United States), yet spending in Asia has been soaring (see Figure 1-2). Already by about the middle of the past decade, Asian spending had surpassed both the European total and the U.S. total. By 2003, Asia's spending on R&D as a share of domestic product (1.92% of its GDP) exceeded that of Europe (1.81% of its GDP). In the next chapter, we present a "map" of global R&D spending. As of 2008, Asia accounted for more than 40% of global R&D spending (US$494.4 billion at PPP), with the United States in second place, at 30.1% (US$365 billion), and Europe in third place, at 23.9% (US$288 billion). China, Japan, and India account for more than 80% of the Asian effort; China was well ahead of Japan in total R&D spending and India was pulling ahead of its former colonial master, Great Britain.

Figure 1-1

Figure 1-1 Gross expenditures on R&D, by selected region and country, 1990–2004

Source: National Science Foundation; available at www.nsf.gov

Figure 1-2

Figure 1-2 Comparison of country growth in R&D spending, 1999–2008

Source: National Science Foundation; available at www.nsf.gov

Let's consider for a moment what this trend could mean for future R&D potential in the West. If Asian nations continue their aggressive increases in R&D spending without a response from the West, within less than a decade—that is, by 2017—Asian expenditures on R&D could exceed combined U.S. and European spending by a factor of 2. By that year, the relative size of the spheres in the global R&D spending contest may look very different from today. (A forecast of this is graphed in Figure 1-3.) As we pointed out earlier, the economic crisis has actually increased the probability that emerging Asia will pull ahead of the rich world in spending ability. With vast debt burdens and low economic growth, increasing R&D spending in the leading Western economies will be difficult. Asian nations are also investing more in the education and training of their huge workforces. Those investments have been showing results in the form of increasing participation in scientific research and patent activity.

Figure 1-3

Figure 1-3 Projected R&D spending in 2017, by region

Source: National Science Foundation; available at www.nsf.gov

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