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China and Europe post double digit increases in R&D spending

MD Staff

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Annual worldwide corporate R&D spending increased by 11% in 2018, totaling US$782bn in annual investment, based on an annual analysis of the 1000 largest global public companies by R&D spend conducted by PwC’s Strategy&.

The 14th edition of PwC’s Strategy& Global Innovation 1000 Study shows how innovation investment is related to long-term growth strategies and confidence, with R&D spending increasing across all regions and nearly all industries.

Globally, all regions saw an increase in R&D spend, most notably China (+34%) and Europe (14%) where spending grew by double digit rates, while North America (+7.8%)  and Japan (+9.3%) saw only single digits increases in R&D. Overall R&D intensity – the measure of R&D spending relative to sales – remains at an all-time high of 4.5%.

Barry Jaruzelski, Principal, PwC US, Strategy&, comments:“The standard of innovation excellence has been rising as businesses have become more competitive in the 21st century. Despite the record high levels of investment, the study’s findings are a further confirmation that innovation excellence isn’t something that can be bought by simply spending more on R&D. Rather, it’s the result of painstaking attention to strategy, culture, senior executive involvement, deep customer insights, and disciplined execution across the innovation cycle.”

In a five-year study of company performance and innovation investment relative to industry peers as part of this year’s report, 88 companies world-wide, across all regions and industries, were assessed as ‘high-leverage innovators’.

These companies outperformed their industry groups on seven key measures of financial success for a sustained five-year period, while at the same time spending less than the median of their industry peers on R&D as a percentage of sales. The basket of seven metrics of financial success include revenue growth, market capitalization growth, operating margin, gross margin, operating profit growth, gross profit growth, and total shareholder return (TSR).

While high-leverage innovators had similar operating and gross margins as other Global Innovation 1000 companies for the five years ending in 2017, the companies demonstrated sales growth which was 2.6 times greater than other companies on the Global Innovation 1000 list and with growth in market capitalization that was 2.9 times higher. High-leverage innovator firms achieved performance at least twice as high as other firms on all other metrics examined. They achieved this sustained superior performance while spending less that the median of their industry peer group on R&D as a percentage of sales for the entire five-year period.

Common characteristics of this set of high-growth companies include:

Alignment: 77% of fastest growing firms say their innovation strategies are highly aligned with their business strategies, compared with 54% of respondents that report the same growth, and 32% of respondents that report slower growth.

Culture: 71% of respondents that report their companies’ revenues are growing faster than competitors say their corporate cultures are highly aligned with their innovation strategy, compared with 53% of companies that report the same growth, and 33% of companies that report slower growth.

Leadership: 78% of companies reporting higher than peer revenue growth say their executive team is highly or closely aligned with R&D investment and innovation strategy, compared with 62% for same-growth companies, and 53% for slower-growth companies.

Regionally, the list reflects the continued dramatic rise of China-based companies — from 3% in the first High-leverage Innovators assessment in 2007 to 17% in 2017. Europe too increased significantly from 18% in 2007 to 30% in 2017.  The number of high-leverage innovators fell 45% for North American companies and 8% for Japanese companies.

By industry, the number of high-leverage innovators rose from 2007 to 2017 in telecommunications, consumer, healthcare, industrials, autos, and aerospace and defence, while the numbers fell in chemicals and energy, computing and electronics, and software and internet.

Of over 1,000 companies examined across three distinct five-year periods ending in 2007, 2012 and 2017; only two companies attained the status of high-leverage innovator across the entire 15-year period:  Apple and Stanley Black & Decker.

Barry Jaruzelski, Principal, PwC US, Strategy& comments:“The success of these high-leverage innovators reaffirms a consistent finding of our study over time: there is no long-term correlation between the amount of money a company spends on its innovation efforts and its overall financial performance. Instead, what matters is how companies use that money and other resources, as well as the quality of their talent, processes, and decision making, to create products and services that connect with their customers unarticulated needs.”

Global Innovation 1000

The Strategy& Global Innovation 1000 study analyses spending at the world’s 1000 largest publicly-listed corporate R&D spenders and is now in its 14th year. Other key findings include:

  • Amazon maintained the top spot as the largest spender on R&D in the Global Innovation 1000 study, for the second year in a row. Sanofi and Siemens rejoined the Top 20 spenders globally.
  • Apple regains the top rank as the world’s most innovative company from Alphabet, while Netflix joins the top 10 most innovative companies list for the first time, according to a global survey of R&D leaders and managers.
  • The consumer industry overtook the software & internet industry for the first time in five years, experiencing fastest year-on-year growth in R&D spending (26% vs 20.6%)
  • Healthcare industry in on track to become the biggest R&D spending sector by 2020.
  • Computing & electronics, healthcare and automotive industries together represent 60% of global corporate R&D spending in 2018.
  • China and Europe saw increases in the number of companies in the Top 1000, while North America (-5%), Japan (-6%) saw decreases.

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A rapid rise in battery innovation is playing a key role in clean energy transitions

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Affordable and flexible electricity storage technologies are set to catalyse transitions to clean energy around the world, enabling cleaner electricity to penetrate a burgeoning range of applications. Between 2005 and 2018, patenting activity in batteries and other electricity storage technologies grew at an average annual rate of 14% worldwide, four times faster than the average of all technology fields, according to a new joint study published today by the European Patent Office (EPO) and the International Energy Agency.

The report, Innovation in batteries and electricity storage – a global analysis based on patent data, shows that batteries account for nearly 90% of all patenting activity in the area of electricity storage, and that the rise in innovation is chiefly driven by advances in rechargeable lithium-ion batteries used in consumer electronic devices and electric cars. Electric mobility in particular is fostering the development of new lithium-ion chemistries aimed at improving power output, durability, charge/discharge speed and recyclability. Technological progress is also being fuelled by the need to integrate larger quantities of renewable energy such as wind and solar power into electricity networks.

The joint study shows that Japan and Korea have established a strong lead in battery technology globally, and that technical progress and mass production in an increasingly mature industry have led to a significant drop in battery prices in recent years. Prices have declined by nearly 90% since 2010 in the case of lithium-ion batteries for electric vehicles, and by around two-thirds over the same period for stationary applications, including electricity grid management.

Developing better and cheaper electricity storage is a major challenge for the future. According to the IEA’s Sustainable Development Scenario, for the world to meet climate and sustainable energy goals, close to 10 000 gigawatt-hours of batteries and other forms of energy storage will be required worldwide by 2040 – 50 times the size of the current market.

“IEA projections make it clear that energy storage will need to grow exponentially in the coming decades to enable the world to meet international climate and sustainable energy goals. Accelerated innovation will be essential for achieving that growth,” said IEA Executive Director Fatih Birol. “By combining the complementary strengths of the IEA and the EPO, this report sheds new light on today’s innovation trends to help governments and businesses make smart decisions for our energy future.”

“Electricity storage technology is critical when it comes to meeting the demand for electric mobility and achieving the shift towards renewable energy that is needed if we are to mitigate climate change,” said EPO President António Campinos. “The rapid and sustained rise in electricity storage innovation shows that inventors and businesses are tackling the challenge of the energy transition. The patent data reveals that while Asia has a strong lead in this strategic industry, the US and Europe can count on a rich innovation ecosystem, including a large number of SMEs and research institutions, to help them stay in the race for the next generation of batteries.”

The joint study follows the publication earlier in September of the major IEA report Energy Technology Perspectives 2020, which has deepened the IEA’s technology analysis, setting out the challenges and opportunities associated with rapid clean energy transitions.

As governments and companies seek to make informed investments in clean energy innovation for the future, sector-specific insights like those offered by the joint study will be highly valuable, including for helping bring about a sustainable economic recovery from the Covid-19 crisis. The innovation study provides an authoritative overview of the technologies and applications receiving research attention – and of those that are underserved. It also shows where they stand in the competitive landscape.

Innovation is increasingly recognised as a core part of energy policy, and this year the IEA has been introducing more tools to help decision-makers understand the technology landscape and their role in it – and to track progress in innovation and the deployment of technologies. This includes a comprehensive new interactive guide to the market readiness of more than 400 clean energy technologies.

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Russia Among Global Top Ten Improvers for Progress Made in Health and Education

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Russia is among the top ten countries globally for improvements to human capital development over the last decade, according to the latest update of the World Bank’s Human Capital Index (HCI).

The 2020 Human Capital Index includes health and education data for 174 countries covering 98 percent of the world’s population up to March 2020.

Russia’s improvements were largely in health, reflected in better child and adult survival rates and reduced stunting. Across the Europe and Central Asia region, Russia, along with Azerbaijan, Albania, Montenegro, and Poland, also made the largest gains in increasing expected years of schooling – mainly due to improvements in secondary school and pre-primary enrollments. The report also shows that over the last 10 years Russia has seen a reduction in adult mortality rates. However, absolute values of this indicator remain high in the country with this progress now at risk due to the global Covid-19 pandemic.

Human capital contributes greatly to improving of economic growth in every country. Investments in knowledge and health that people accumulate during their lives are of paramount concern to governments around the world. Russia is among the top improvers globally in the Index. However, challenges persist and much needs to be done to improve the absolute values of Index indicators,” said Renaud Seligmann, the World Bank Country Director in Russia.

The HCI, first launched in 2018, looks at a child’s trajectory, from birth to age 18, on such critical metrics as child survival (birth to age 5); expected years of primary and secondary education adjusted for quality; child stunting; and adult survival rates. HCI 2020, based on data up to March of this year, provides a crucial pre-pandemic baseline that can help inform health and education policies and investments for the post-pandemic recovery.

Of the 48 countries in Europe and Central Asia included in the 2020 Human Capital Index (HCI), 33 are among the upper-third in the world, and almost all are in the top half. However, there are significant variations within the region.

In Russia, a child born today can expect to achieve 68 percent of the productivity of a fully educated adult in optimal health. It is at the average level for Europe and Central Asia countries and the third result globally among the countries of the same income group. There is a stark contrast between education and health subscales in Russia. While the education outcomes of the country are high and outperform many high-income peers, its health outcomes are below the global average.

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Accelerating Mongolia’s Development Requires a Shift “from Mines to Minds”

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A new report by the World Bank estimates that out of every dollar in mineral revenues Mongolia has generated over the past 20 years, only one cent has been saved for future generations. The report argues that to break this cycle, Mongolia should use its mineral wealth to invest in people and institutions, while gradually reducing its dependence on the sector.

This is particularly true as demand for key minerals is likely to tumble due to climate change concerns, a shift of investors’ preference toward sustainability, China’s ambitious goal to reduce coal consumption, and persistence of the COVID-19 shock, according to Mongolia’s Mines and Minds, the World Bank’s September 2020 Country Economic Memorandum for Mongolia.

Since the advent of large-scale mining in 2004, Mongolia’s economy has grown at an average rate of 7.2 percent per year, making it one of the fastest-growing economies in the world. Growth has translated to rapid decline – although at times partly reversed – in the incidence of poverty and improved quality of life. The report also notes that Mongolia enjoys relatively strong human capital, and its infrastructure capital has improved for the last few decades, though remains scarce given the size of the country and low population density. This performance has been made partly possible through a generous but inefficient social assistance system and a large public investment program supported by mineral revenues and external borrowing.

However, a number of enduring challenges have grown in the shadow of this success. Mongolia’s rapid growth has been obscured by its extreme macroeconomic volatility and frequent boom and bust cycles. Growth has almost entirely come through capital accumulation and the intensive use of natural capital rather than through sustained productivity growth. Meanwhile, the country has not only consumed almost all its mineral outputs, but has also borrowed heavily against them, bequeathing negative wealth to the next generation.

Instead of maximizing the benefits of its mineral wealth for diversified and inclusive growth, Mongolia has increasingly become more addicted to it. At the same time, human capital has been underutilized and institutional capital has eroded.” said Andrei Mikhnev, World Bank Country Manager for Mongolia. “Such inability to capitalize on the country’s endowments has resulted in limited diversification of outputs and exports and has further amplified its vulnerability to the swings of the global commodity markets. Breaking this gridlock calls for a fundamental shift in approach that puts investing in minds on an equal footing with mines.”

The report recommends key policy actions to build the foundation of a diversified and sustainably growing  economy. These include:

  • Implement countercyclical fiscal and monetary policies – supported through transparent fiscal rules, an independent fiscal council, a market-driven exchange rate, and a well-functioning stabilization fund – to smooth consumption over the business cycle rather than maximize current consumption.
  • Undertake bold investment climate reforms to enhance competition, secure investor rights, and create a more level playing field that enables productive firms to invest and grow.
  • Move away from the mindset of diversifying products to expanding endowments, especially in terms of better utilization of Mongolia’s young and educated, especially female, labor force.
  • Accelerate the implementation of fundamental governance reforms (especially on the government effectiveness and control of corruption) to reduce political interference, increase transparency, and improve regulatory quality throughout the economy.

“Fortunately, there are many encouraging signs of improved macroeconomic management in 2017-19, providing the new government an opportunity to advance its reform efforts,” said Jean-Pascal Nganou, World Bank Senior Country Economist and lead author of the report. “Some impressive fiscal outcomes were achieved not by introducing new reforms but by effectively implementing existing ones. They demonstrate that with the right political will and leadership, similar improvements are possible in other areas including monetary and exchange rate policy, the financial sector, the business environment, and the labor market. The new administration has, therefore, an opportunity to institutionalize these reforms and avoid policy regression in the future.”

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