An R&D recession

Today’s economic crisis partly springs from years and years of under-investment in research and development.
In the West, many dubious innovations have occurred in the financial sector in recent years. We’ve seen derivatives, sub-prime mortgages, collateralised debt obligations, and quantitative easing.

Yet these novelties don’t tell the whole story. Manufacturing companies themselves have moved, relentlessly, into financial affairs. Many of the problems at General Motors and General Electric stem from these companies’ involvement in financial matters – in these two cases, pensions (GM) and property loans and credit card debt (GE Capital) (1). In the UK, service providers such as British Telecom and British Airways also face big pensions liabilities.

The flipside of mainstream firms’ long dalliance with financial innovation, however, is their neglect of technological innovation. Take UK retailers, for example. They are not falling over themselves to adopt ‘contactless’ payment systems, similar to Transport for London’s Oyster card, so as to speed the use of credit cards at the checkout. Instead, domestic appliance and consumer electronics retailers such as Dixons or Comet prefer to make much of their money from charging you and me vast sums to guarantee that a repairman will come when their machines break down. Meanwhile, Tesco is set to open 30 bank branches in its stores this year, and may move into the mortgage market some time in the future.

The decline of technological innovation is the basis for all of today’s financial shenanigans. And this decline is by no means confined to the technological backwater that is the UK. If we look at the picture for Research and Development (R&D) in the OECD area, two trends are immediately apparent. First, business expenditure on R&D as a percentage of GDP has risen only in Japan in the past 20 years; in the US and the EU, it has been stagnant:

Business expenditure on R&D as a percentage of GDP, Japan, the US, OECD area and EU 27, 1989-2007 (2)

Second, government expenditure on R&D as a percentage of GDP has – again, with the exception of Japan – been in a steep descent:

Government expenditure on R&D as a percentage of GDP, Japan, the US, OECD area and EU 27, 1989-2007 (3)

 

These charts show that the financial crisis in the US and the EU has its roots in the real economy.

Of course, as the example of Japan shows, to spend money on R&D doesn’t guarantee economic success: it is in the nature of research that one cannot predict a positive outcome. As a proportion of GDP, Japan spent more and more money on R&D in the 1990s, but experienced those years as the ‘lost decade’. However notto spend serious money on R&D, as Western governments have done, has helped ensure that the initiative for innovation has begun to pass from West to East. Here are the figures for the main spenders on R&D, West and East:

Gross domestic expenditures on R&D, 2007, billions of US dollars, purchasing power PPA (4)

country	R&D spend (US $, billions)
USA	368.8
Japan	138.8
China	86.8
Germany	69.3
France	43.36
South Korea	35.89
UK	35.6
Russia	25.12
Taiwan	16.55

China has overtaken Germany in R&D spending, and now presses on the heels of Japan. Korea has surpassed the UK, while Taiwan – population just 23million – is not to be sneered at.

It’s true that all of these are only bald figures. If we look at the number of researchers per thousand jobs, OECD figures suggest an upward trend, with the EU moving from five to six between 1995 and 2006, and the US rising from eight to 10 between 1988 and 2003 – before slipping back somewhat (5). Nevertheless, to have merely one in every 100 American jobs devoted to R&D is nothing to write home about.

Defining and measuring R&D is important, but has vexed specialists for years. For instance, until summer 2008, Britain’s National Endowment for Science, Technology and the Arts (NESTA) made a major effort to suggest that the country’s weak R&D figures failed to capture all the R&D that was really going on: for example in financial intermediation, and even in the public sector (here NESTA talked up the Open University, created in… the 1960s) (6).

NESTA’s was a convenient thesis, but one that cannot altogether be excluded. However, if we look at the latest official UK figures for R&D conducted by firms in, say, the energy sector, the picture of their priorities is stark, and shocking:

Energy firms active in the UK: research intensity, 2007/8 (7)

Firm	R&D spend, £m	R&D, % of sales
British Energy	15	0.5
E.ON	8	0.1
British Nuclear Fuels	7	0.8
Scottish & Southern	3.7	< 0.1
Scottish Power	1	< 0.1
BP	284	0.2
Royal Dutch Shell	603	0.3
British Gas	8	0.1
National Grid	13	0.1
Pelamis Wave Power	3	> 99.9
Renewable Energy	1	22.8
Alternative Energy Firms: none with enough R&D for inclusion

For every million they earn, firms active on the UK energy scene typically spend one, two or three thousand pounds in the laboratory.

If you pay peanuts… Of course, energy is just one sector, and Britain is an economy that has already undergone more than a century of decline. Yet it is chastening to find that multinational giants such as BP and Shell spend such a tiny proportion of their sales revenue on R&D – at a time when the energy sector is so prominent in the debate about climate and the future.

Britain isn’t just doing very little R&D. It is also pursuing ‘knowledge’ with highly dubious claims to such status. A cover story in a recent issue of the Financial Times Magazine found ‘42 universities offering a total of 84 courses in subjects such as reflexology, aromatherapy, acupuncture and herbal medicine, all beginning this September. Of these, 51 are courses leading to BSc degrees, meaning graduates will be entitled to assert that they are scientifically trained to the highest standards.’ (8)

Isn’t it time that Britain cut back drastically on activities of such dubious merit, and spent money instead on genuine scientific and technological advance?