Study shows Middle East companies lag in R&D spending

Globalisation has altered the pattern of research and development investment at the world’s top companies. It has become easier for companies to send corporate R&D offshore in search of higher growth markets, skilled labour and more flexible operating environments.

In our most recent Global Innovation 1000 Study, we found that this shifting pattern made Asia the top destination for R&D spending last year. The globalisation of R&D is also an opportunity for the Middle East to attract more R&D investment and so increase innovation in the region.

This form of globalisation has thus far largely bypassed the Middle East and there is only one company in the region whose R&D spending was large enough to rank among the top 1,000 publicly traded R&D spenders: Saudi Basic Industries Corporation (Sabic).

This does not necessarily reflect the full scale of R&D activity, given that some of the region’s largest R&D spenders are not listed and thus could not be part of the research.

But there is still significant pot­ential for the region to attract more corporate R&D spending, considering that the Middle East scores well on two of the factors companies consider most when choosing R&D destinations – closeness to consumers and gaining insight into local market needs.

Innovation is an important source of competitive advantage. The 1,000 largest public companies, ranked by innovation outlays, spent US$680 billion on R&D last year, up by 5.1 per cent from 2014. Such global innovation spending by multinational corporations is highly beneficial for local economies because it boosts inbound investment, economic activity, job creation and technology transfer.

Indeed, the study found that 94 per cent of the world’s largest in­no­vators now conduct elements of their R&D programmes abroad.

The top five publicly traded companies worldwide that spent the most last year on R&D were Volkswagen (Germany), Samsung (South Korea), Intel (United States), Microsoft (Uni­ted States) and Roche (Switzerland). Apple also made its first appearance ever in the Top 20 R&D Spenders list, despite being an efficient innovator and spending only 3.3 per cent of its revenues on R&D, compared with an average 12.5 per cent for the other 19 companies on the list.

Last year, Apple and Google remained the two most innovative companies. Tesla jumped to third place, pushing Amazon down to fifth. Toyota also rejoined the ranking for the first time since 2012 at No 10. Last year marked the first time two vehicle-manufacturing companies were in the 10 Most Innovative Companies list.

The most important factors companies consider when choosing where to conduct R&D are access to technical talent (71 per cent), proximity to customers (68 per cent) and gaining insight into local market needs (64 per cent). Interestingly, R&D professionals place less stress when selecting a location on the cost of labour, the tax regime and the strength of local software design capabilities.

Considering the global trend of companies taking their R&D spending closer to key growth markets, it is not surprising that Asia is now the top destination for corporate R&D. Asia accounted for 35 per cent of total in-region R&D, including domestic and imported R&D. This places Asia ahead of North America and Europe, which is in third place. Just nine years ago, in 2007, Europe was the leading location for R&D.

In the Middle East, governments can help to realise the region’s potential and enable the flow of private R&D funding by addressing important gaps in the components of their respective innovation ecosystems.

As a priority, regulatory and legal enablers can be strengthened by addressing intellectual property protection rights, ease of business creation and foreign ownership in local technology start-ups.

Second, governments can play an enabling role in supporting necessary funding for R&D commercialisation efforts.

Finally, governments – and state-owned enterprises – can complete the circle through supporting demand for locally developed products through in-country value initiatives.

To an equal degree of importance, governments still need to address the significant shortfall in technical talent and commercialisation know-how. These efforts can be most effective if they take the form of innovation-driven partnerships with global companies attracted by the region’s growth potential. Through these partnerships, governments can:

• Expand university-linked research parks to enable access to, and increased engagement levels of, the aspiring talent pool.

• Encourage the growth of research clusters in high-growth economic sectors where global companies can establish satellite R&D capabilities.

• Sponsor technology-transfer alliances between global companies and local champions that facilitate the exchange of ideas, talent and R&D know-how.

• Support commercialisation funding and infrastructure that will allow the increasing level of basic research in the region to translate into valuable products and services.

Given the Middle East’s growing importance in the corporate world, with its growing number of global companies and a huge consumer market, there is still much need and opportunity for increased in-country corporate R&D in the region.

Per-Ola Karlsson is a partner and Abdullah Jefri a principal with Strategy& (formerly Booz & Company).

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