Time for a renaissance in R&D spend: U.K. business and government can reverse the decline to secure long term competitive advantage

U.K. imports of R&D from other countries of the world have increased by 12%

London, October 27, 2015 – The face of U.K. R&D investment is changing as globalisation makes it increasingly attractive for U.K. companies to redeploy their R&D spend globally. This issue is also affecting Europe which has fallen from first to third place for corporate R&D spending, as companies send corporate R&D offshore in search of higher growth markets, skilled labour, and more flexible operating environments. This is according to the newly release 2015 Global Innovation 1000 Study, from Strategy&, PwC’s strategy consulting business, which uniquely examined the R&D footprint of 207 of the world’s largest corporate R&D spenders.

This year’s report found that not only has the wider European region become less attractive for R&D investment and is now in third place behind Asia and North America, the former taking the lead and the latter remaining in second space, but the U.K. is also increasingly importing R&D from different regions of the world.

Ashley Unwin, PwC U.K.’s head of consulting, notes that: “According to PwC’s 2015 Annual CEO survey almost 90% of U.K. CEOs saw digital technologies as vital to their success and a source of competitive advantage and 84% were worried about skills gaps.  If the U.K. is to address these CEO concerns and thrive as a growing knowledge economy, the long-term decline in U.K. R&D investment identified in this survey must be reversed.”

“Although risks to the global economy remain at the forefront of CEO minds, recent U.K. economic growth offers a better environment for a renaissance in U.K. R&D spend. U.K. corporates together with Government have the opportunity to drive more domestic R&D investment to build a U.K. economy that is recognized as a haven for talent, skills and knowledge.”

“Global R&D competition is intense but the U.K. is well-positioned to reverse the R&D decline.”

Some findings from this year’s study on U.K. R&D Imports

  • The majority of imports to the U.K. came from the U.S. and Japan in both 2007 and 2015.
  • The U.K. fell from the third-largest importer of R&D in 2007 to the fourth-largest in 2015; India is now in third place, with the U.S. and China taking the first and second spots respectively.

Some facts from this year’s study on U.K. Exports

  • The U.K. increased total low-cost country (LCC) R&D spend by 185% but decreased total high-cost country (HCC) R&D spend by 22%.
  • The U.K. increased offshore Asian R&D spend - to HCCs like Japan, South Korea, and Singapore - by 98%, and offshore Asian R&D spend by LCCs like India, China, Thailand, and Indonesia - by 148%.
  • Exports to the U.S. represented 40% of all U.K. exports in 2007, but just 33% in 2015 as R&D flows to China and Japan.

Mark Couttie, Strategy& Partner, notes: “There are advantages associated with a global R&D footprint. We found that companies that deployed 60% or more of corporate R&D spending abroad in 2015 earned a premium of 30% on operating margin and return on assets, and 20% on operating income over their less outward looking competitors.

He adds: This finding was similar to the results of our 2008 study, when we initially began looking at the footprint of global R&D spend, suggesting that there continues to be a payoff from the deployment of capabilities and capacity on a global scale, and greater success in understanding and meeting local market needs.”

Survey respondents cited proximity to a high-growth market as the top reason for moving R&D to China (71%), followed by proximity to key manufacturing sites (59%) and proximity to key suppliers (54%). Lower development costs (53%) ranked fourth.

The study also found that amongst the world’s 1000 largest R&D spenders

  • Computing and electronics (C&E) remains the largest industry by R&D ($166 billion in 2015/£108 billion*) but is losing ground.
  • The healthcare industry is closing its gap on C&E as the largest industry by R&D spending, with $145 billion (£95 billion*) and a growth rate of 6% in 2015. Given C&E’s negative growth over the last couple of years, we believe healthcare could become the largest industry based on R&D spending by 2019.
  • Software and Internet had the highest growth rate of all the industries (27%), which propelled it past the industrials sector to become the fourth-largest industry by R&D spending in 2015.

*Dollar conversions took place on Thursday 8 October at 5pm, figures were rounded up where appropriate.

Globalization advantage
As globalisation increasingly becomes the norm, companies are reaping the benefits of conducting R&D outside of their home country. Companies with more global R&D footprints now perform as well or better than companies with a narrow footprint, suggesting that there are material advantages to exporting R&D and that multinationals are able to coordinate successfully across many global sites.

Additionally, companies seem to derive benefits from a diverse global footprint as survey respondents say access to technical talent (71%), being close to customers (68%) and gaining insight into local market needs (64%) are important attributes in choosing where to conduct R&D.

About PwC’s Strategy& Innovation 1000
For the past 11 years, Strategy& has analysed R&D investment at the 1,000 public companies around the world that spend the most on R&D. We estimate that this represents about 40% of total global innovation spending by all public and private companies, as well as not-for-profit organisations. We focus on the top 1,000 spenders because the next 1,000 companies reflect only 3% of total global innovation spending .

About Strategy&

Strategy& is a global team of practical strategists committed to helping you seize essential advantage. We do that by working alongside you to solve your toughest problems and helping you capture your greatest opportunities. We bring 100 years of strategy consulting experience and the unrivaled industry and functional capabilities of the PwC network to the task. We are part of the PwC network of firms in 158 countries with more than 236,000 people committed to delivering quality in assurance, tax, and advisory services.

Contact Martina Mazzon
Telephone: +44 20 7393 3251
contact >