The shifting map of global innovation In the 2015 Global Innovation 1000 study, Strategy&, PwC's strategy consulting group, provides new insights into the ways corporate innovation spending—which totaled $680 billion last year—has been changing in recent years, and examines the implications both for the future course of global economies and for corporate performance. How and where innovation is performed matters: As Harvard Business School professor Michael Porter, author of classic texts on corporate strategy and the competitive advantage of nations, has noted, “Innovation is the central issue in economic prosperity.”
If you look at global innovation spending in terms of where companies are headquartered, it’s not obvious that much has changed over the years: It always looks like North America is number one, Europe is number two, and Asia is number three. But that conceals what has actually been happening. If you instead focus on where the world’s largest companies actually do the work of innovation, the story is very different.
We’ve done that analysis in this year’s study, comparing today’s data with the situation in 2007, when we first examined the globalization of corporate innovation spending. Just eight years ago, the top region for R&D activity was Europe, which accounted for 35 percent of the global total, followed by North America with 34 percent, and Asia, with 27 percent. Today, the order has reversed: Asia is now number one, with 35 percent, North America is still second, with 33 percent, and Europe is last with 28 percent. A complete reversal in just eight years.
Asia’s rise and Europe’s decline
The fact that innovation spending is rising in Asia is not a surprise, but our study details the magnitude and rapid pace of the growth: Total corporate R&D activity grew 120 percent in China, for example, between 2007 and 2015, and by 115 percent in India. Most of this spending is being conducted by companies from Europe and the U.S., and they are not primarily seeking lower labor costs. According to R&D executives, their chief motivations are to be closer to their customers and suppliers in these fast-growing economies, and to gain access to the right technical talent.
The relative weakness of R&D spending in Europe, however, is a surprise. Innovation spending in Europe grew by only 9 percent from 2007 to 2015, while the amount of R&D spending European companies did in other regions increased 46%. The decline of particular counties has been even sharper. In Germany, for example, inflows of R&D spending from other countries fell by 7 percent from 2007 to 2015, while R&D “exports” to other countries rose 76 percent. In France, inflows fell 21 percent, while exports rose 46 percent. Overall, the data suggest that Europe is seeing a relative “hollowing out” of its innovation capabilities.
The U.S., in contrast, has maintained its #1 relative position in corporate R&D activity, despite the fact that U.S. companies still exported quite a bit of R&D to Asia and Europe. One reason is that U.S. companies continued to increase their R&D spending in the U.S. at healthy levels; the other is that the U.S. benefitted from significant imports of R&D activity from other regions—including from European companies who have been attracted by the U.S.’s stable economy, its flexible and innovation-oriented business culture, and the depth of R&D talent available—especially in software and digital businesses.
Global innovators outperform
Our study also shows that globalizing innovation pays: Companies that overweight their R&D spending outside their headquarters country outperform their less globalized competitors. Our study found that companies that deployed 60 percent or more of their R&D spending abroad in 2015 earned a premium of 30 percent on operating margin and return on assets, and 20 percent on growth in operating income.
I’ve guided the Global innovation 1000 study since its inception 11 years ago, and our analyses of R&D spending by corporations have provided many important insights. We’ve demonstrated conclusively, for example, that the amount of money a company spends on R&D does not correlate with its success as an innovator, or with its financial success. Instead, we’ve shown that what matters is a company’s ability to translate its innovation spending into superior products and services via superior end customer insight and R&D portfolio management. This, in turn, flows from an innovation strategy that’s tightly aligned with the company’s business strategy, a well-tuned capabilities system, and a corporate culture that supports innovation. (All previous Global Innovation 1000 studies are available online.)
This year’s study suggests that that the globalization of R&D spending will continue to yield benefits. As companies further develop and optimize their global innovation networks, they will continue to tap into more diverse talent pools and gain deeper insights into growing markets. The net result will be more innovative and profitable companies, and further increases in global economic prosperity.
AUTHOR BIO: Barry Jaruzelski is a thought leader on innovation for Strategy&, PwC’s strategy consulting business. Based in Florham Park, N.J., he is a principal with PwC US. He works with high-tech and industrial clients on corporate and product strategy and the transformation of core innovation processes. He created the Global Innovation 1000 study in 2005, and in 2013 was named one of the “Top 25 Consultants” by Consulting magazine.