R&D race

R&D race

The links between investment in research and development and improved business performance are clear, but most Asian economies are still far behind leaders Japan and Korea

A researcher works in the Global Innovation Incubator, opened this year by Thai Union Group (TU), one of the world's largest seafood companies. TU has invested 600 million baht in the facility, in collaboration with Mahidol and Kasetsart universities and King Mongkut's University of Technology Thonburi. Photo: Jiraporn Kuhakan
A researcher works in the Global Innovation Incubator, opened this year by Thai Union Group (TU), one of the world's largest seafood companies. TU has invested 600 million baht in the facility, in collaboration with Mahidol and Kasetsart universities and King Mongkut's University of Technology Thonburi. Photo: Jiraporn Kuhakan

Asian economies have been stepping up their spending on research and development (R&D) considerably in recent years with the aim of improving economic performance and competitiveness. Governments in the region are encouraging businesses to invest more in R&D in the belief that innovative companies last longer, create more jobs, earn more money and pay more taxes.

The combined R&D budgets of Asian economies are increasing by almost 1% per year, according to the 2016 Global R&D Funding Forecast by the US-based Industrial Research Institute (IRI). North America and Europe, in contrast, are seeing a decrease in R&D investment in absolute terms because of weak economic conditions.

Asian countries currently account for more than 40% of global R&D investment with the key players being South Korea, Japan, India and China. In Southeast Asia, the leaders by a big margin are Singapore and Malaysia.

South Korea, which spent 4.15% of its gross domestic product (GDP) on R&D in 2013, is one of the world leaders. Its large, dominant conglomerates such as Samsung, LG Electronics, Hyundai and Posco, continue to shift their strategic focus from manufacturing to R&D and innovation to remain at the forefront of technology.

According to a survey by Forbes magazine, Samsung is now the world's third most innovative company, behind only Apple and Google. Its success is attributed in large part to decades of substantial investment by South Korea in science, technology, engineering and mathematics education.

As well, the electronics giant has a strong manufacturing base and control over a vertically integrated supply chain which allows for rapid incremental innovation.

Japan is the other Asian leader, spending 3.34% of its GDP on R&D in 2012, with its major corporate groups taking the lead. However, participation of smaller enterprises in national R&D efforts and output is relatively limited.

Innovation by large Japanese firms relies less on contracted public research and international collaboration than on open innovation within the group. The main R&D performers are in high-technology and medium-high-technology manufacturing: TV and communication equipment, motor vehicles and pharmaceuticals.

Japan's success is rooted in its ICT infrastructure, especially wireless broadband access, and like South Korea, a sound skills foundation.

Japan also does consistently well in education with 44% of its adult population receiving a tertiary education, well above the European Union average of 26% and slightly above 41% in the United States.

Both the South Korean and Japanese governments also provide tax incentives to encourage R&D, especially to small and medium enterprises (SMEs) rather than large corporations. The Japanese government offers SMEs a tax credit of up to 12% of total R&D expenditure, and 8-10% for larger companies.

The success of Japan and Korea as R&D centres reflects the openness of their economies and the large contribution of international trade to GDP, according to Shabih Mohib, the senior economist for East Asia and the Pacific with the World Bank.

"These two countries are very well integrated in the high value-added supply chain which looks at a more creative innovative design area," Mr Mohib told Asia Focus. "That is one reason why they have more innovative products and continue to be at the frontier of smart technology."

Given the beneficial spill-over effects of R&D investment and because many businesses tend to underinvest in R&D, it is essential that governments provide effective incentives to persuade them to invest more, he added.

However, many businesses perceive R&D investment as high-risk. Recent research in the US has indicated that while R&D investment is indeed more risky than capital investment, on average it produced a return about three times larger than capital investment.

But this is significant for the long-term growth of companies because, according to the annual Research and Development Scoreboard produced by the British government, firms that invest more in R&D tend to increase their sales and productivity, as well as market value.

CHINA & INDIA

With Japan and Korea setting a world-beating pace, the region's two largest countries have a lot of catching up to do. India spends a mere 0.8% of its GDP on research and development and its private sector accounts for only 16.4% of that total. The country's largest private company by market value, Reliance Industries, spent a negligible 0.16% of its 2.1 trillion rupees (US$31.25 billion) in revenue on R&D in 2010.

China spent a respectable 1.98% of its GDP on R&D according to data available from 2012, but again most of the spending was in the public sector. PetroChina, one of the country's flagship energy businesses, spent just 1% of its sales on R&D.

The Indian government has been looking to promote corporate R&D through tax incentives, allowing a 200% deduction for in-house R&D expenditure.

Mohsin U Khan, a retired scientist who worked at the National Institute of Science, Technology and Development Studies in New Delhi, says India needs to play to its strengths.

"India's advantage is cost as R&D can be performed at 15-20% the cost in Europe and the US," he said. "In dollar terms, the advantage is about 10-15 times.

"In comparison to China, India has a higher comfort level with the English language and can better avoid the cultural confusion that comes with it, which has made China's software industry immature," he said, adding that Indian companies had also won a reputation for low-cost, high-quality software delivery.

The Chinese government is also encouraging more enterprise-centred innovation to promote technological development. Since 2010, R&D tax credits have been available to selected businesses, while investment in equipment can benefit from accelerated depreciation, according to a recent report from the Organization for Economic Cooperation and Development.

Nissan has invested one billion baht in an advanced test centre in Thailand. The 6,000-square-metre facility includes an anechoic chamber, acoustic chamber and vibration simulator with environment chamber.

ASEAN EFFORTS

In Asean, Singapore and Malaysia have taken the lead in R&D with expenditure of 2% and 1.13% of their GDP, respectively, in 2012. Singapore introduced its first five-year plan focused on technology and the economy in 1991 and established the National Research Foundation in 2006. The R&D budget for the five-year plan from 2016-20 is S$19 billion.

The Singaporean government places a particularly high emphasis on biomedical R&D and is now offering incentives to local companies to sustain R&D activities in the field to multinational corporations to do more research in the city-state. It is also on its way to forming biomedical clusters, emulating a similar South Korean model.

The 11th Malaysia Plan for 2016-20, meanwhile, aims to focus on translating innovation into wealth by strengthening "relational capital" to foster collaboration and trust among all parties involved in research.

Thailand, however, trails its more affluent neighbours, spending only 0.2% of GDP on R&D, with a fairly small private-sector component. The current government hopes to improve those numbers and in August last year it increased the deduction of expenses related to R&D to 300% of taxable income, from 200% in the past.

Kiatipong Ariyapruchya, senior country economist with the World Bank, said that apart from tax incentives, the government should focus on removing obstacles for businesses, starting with the shortage of skilled labour.

"Thailand spends about 5% of its GDP on education, which is quite high, around the same as South Korea," he said, but the system has little to show for that money in terms of results.

The country's performance as measured by Pisa (Programme for International Student Assessment) scores, is one of the lowest in the region, reflecting the failure of the education system to produced the skilled people that the economy needs.

The fact that English is not widely used in Thailand remains an obstacle. Skilled professionals in some fields, for instance doctors, are still prevented from practising in Thailand because they first need to pass an exam that is in Thai.

"If skilled professionals are prevented from coming to Thailand, this will negatively affect R&D," Mr Kiatipong said.

Better protection of intellectual property rights would also be an incentive for firms to engage in R&D, he added.

Siriporn Pittayasophon, director of the Department of Human Capital with the National Science, Technology and Innovation Policy Office, agreed that Thailand does not measure up to Singapore or Malaysia, but she stressed that R&D expenditure in Thailand has been continuously increasing.

"The incentives are there," she said, noting that the Board of Investment (BoI) has offered tax and other incentives for R&D expenditure.

"Furthermore, we have tried to attract Japanese multinationals to invest in Thailand's electronic and automotive industries with clear successes," she said. "In the past, they used to focus only on production but have since shifted their focus to R&D."

One notable example is Nissan Motor Asia Pacific, the regional arm of the Japanese automaker. Earlier this year it opened a high-tech test centre in Thailand to advance innovation and technology.

"With an investment of over one billion baht, the new R&D test centre is the first overseas R&D vehicle test facility in Asean and Oceania," said Pimporn Siriwan, vice-president of corporate communication at the Thai unit.

Research done at the facility, she said, would allow enhance the uniqueness and competitiveness of Nissan vehicles and also benefit customers.

"We believe this new test centre can further strengthen Nissan's foothold in the Asia Pacific region and boost the manpower skill sets and economy of this country," Ms Pimporn said.

However, Nonarit Bisonyabut, a research fellow with the Thailand Development Research Institute (TDRI), believes the environment in Thailand is still not very conducive for firms to engage in R&D.

He believes BoI policies to attract foreign direct investment still do not place enough emphasis on technology transfer, with the result that multinationals still view Thailand mainly as a cheap-labour country.

The fact that Thailand allows movement of migrant workers to keep wages down exacerbates the problem, in his view. The areas where Thailand has remained weak are in education, financial services and consumer products.

"I think Thailand should focus both on the areas that it is strong in and the areas it wants to develop. However, the key is to make sure their progress is constantly monitored," Dr Nonarit said.

"The government should grant support to R&D activities that pass examinations as in the case of South Korea, where certain progress benchmarks are set in advance and only firms that satisfy that criteria can receive additional support," he continued.

"It is not out of reach. Siam Cement Group (SCG), for instance, has innovated and successfully developed a new method of homebuilding that is quicker and more efficient -- using materials that are able to absorb heat from the sun."

Among the Asean nations, there clearly is a disparity in R&D spending between high-performing countries such as Singapore and Malaysia and low-performing countries such as Thailand.

"There is, however, no correlation between a country's R&D status and integration of the region," said Mr Mohib of the World Bank. "Asean has a lot of potential as a source of continued economic growth and prosperity for all."

He recommended that the focus, however, should be on closing the income divide.

"Once you close the income divide, you will see much more demand for goods of higher innovative content and you will also get the supply chain to deliver."

When asked to forecast the future trend of R&D in the region, Mr Mohib is optimistic.

"I think R&D spending will probably rise because there are a lot of push and pull factors for it," he said. "However, it is difficult to tell what will be the outcome of that expenditure because it depends on a host of other activities and variables."

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