BERKELEY – As countries around the world struggle to lay the foundations for stronger sustainable growth in the future, they would do well to focus on policies that encourage innovation.

Empirical studies across time and countries confirm that innovation is the primary source of technological change and productivity growth. And investments in research and development, as well as in the scientific and engineering workforce on which they depend, are critical drivers of innovation and national competitiveness.A new study by the National Science Board, the governing body of the National Science Foundation in the United States, examines trends in such investments for both individual countries and regions. These trends indicate that the global landscape for innovation changed significantly during the last decade.That landscape is likely to change further as several Asian economies, particularly China and South Korea, increase their investments in R&D and scientific and engineering education to secure their place as significant hubs of innovation. At the same time, crushing debt burdens may compel the US, Europe, and Japan to reduce their investments in these areas.The US remains the global leader in R&D investment, spending an estimated $400 billion in 2009 – a total boosted by President Barack Obama’s stimulus package, and higher than China, Japan, and Germany combined. But, in terms of R&D spending as a share of GDP, the US ranked only eighth in 2009 (at 2.9% of GDP). The US share remained above the OECD average, but this was mainly the result of national differences in the amount of R&D defense spending. Indeed, defense accounted for 52% of US R&D in 2009, and for more than 50% during the last 25 years. The defense share of R&D in the European Union and Japan has been and remains markedly lower – less than 10% in the EU and less than 5% in Japan in 2009 (no comparable data are available for China and South Korea). Over the next decade, sizeable cuts in defense spending as part of overall deficit reduction could mean a significant reduction in R&D investment in the US.Between 1999 and 2009, global R&D spending grew at an average annual rate of 7%, accelerating to 8% during the last five years, despite the global recession. During the entire period, R&D spending grew significantly faster than global output, reflecting both increasing government support and a rising share of technology-intensive industries in global production and trade.But these aggregate figures obscure differences among countries and regions. Over the decade, the US share of global R&D fell from 38% to 31%, the EU share fell from 27% to 23%, and Asia’s share rose from 24% to 32%. Within Asia, R&D spending in China grew at an astounding 20% annual pace – twice the country’s GDP growth rate – and by 2009 China had surpassed Japan to become the world’s second-largest investor in R&D. Spending on R&D also grew rapidly – about 10% annually – in South Korea. By contrast, R&D spending grew by 4% in Japan, 5% in the US, and roughly 6% in Europe.Throughout the world, the business sector remains both the predominant performer and the predominant funder of R&D investment. In 2009, business accounted for 75% of R&D funding in Japan, 73% in South Korea, 72% in China, 67% in Germany, and 60% in the US, whose companies are the largest R&D investors in terms of absolute purchasing power, spending more than twice as much as Japanese businesses. But business investment as a share of GDP has changed very little in the US over the last decade, while it has risen rapidly in many other countries, including China, Singapore, South Korea, and Israel.Global multinational companies are the largest business-sector R&D investors in the US and other countries. For example, multinational companies, whether headquartered in the US or elsewhere, accounted for about 84% of private (non-bank) R&D investment in the US in 2009, about the same as a decade earlier.

And US multinationals still locate about 84% of their R&D activities in the US, often in innovation clusters around research universities. But this share has declined during the last decade, as US multinationals have shifted some of their R&D from the US and Europe to Asia in response to rapidly growing markets, ample scientific and engineering talent, and generous subsidies.Global competition for multinational companies’ R&D activity, and for the local benefits that it brings, is likely to intensify in the future, with many countries already offering sizeable tax credits and extended tax holidays.

The Asian economies have been particularly aggressive in the use of such incentives. And, recognizing that the availability of a workforce with the necessary skills is a key determinant of where businesses locate their R&D activities, many countries are increasing their investments in tertiary education and training in science, engineering, and technology.Engineering accounts for only 4% of all bachelor’s degrees in the US, compared to 19% in Asia – which now accounts for half of all engineering degrees being awarded – and 33% in China. Many countries are also changing their immigration laws to make it easier to attract highly skilled workers, especially scientists and engineers, who are increasingly mobile.

Meanwhile, immigration policies in the US and Europe are making it more difficult to attract and retain such workers, compelling companies to shift R&D abroad to find the talent that they need.As a result of these changes, the global landscape for innovation has been transformed over the last decade. Ours is now a world in which many emerging-market countries have made advancement in science and technology a top priority, and in which multinational companies’ R&D investments have become much more mobile.

As the US and other developed countries embark on austerity plans to contain their debt, they must heed these changes in the innovation landscape and boost their investments in R&D – and in science and engineering education – even as they make painful cuts elsewhere.Laura Tyson, a former chair of the US President’s Council of Economic Advisers, is a professor at the Haas School of Business at the University of California, Berkeley.Copyright: Project Syndicate