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Innovation's Big Spenders

China and India are fast catching up to the West in R&D spending.
Don Durfee, CFO Asia
January 18, 2008

China and India may trail far behind the Western world in terms of R&D spending, but they are catching up fast. That's the conclusion of a recent study of corporate innovation spending by consulting firm Booz Allen Hamilton.

Chinese and Indian companies spent just US$2.1 billion on R&D in 2006, according to the study, compared with US$194 billion for North American businesses. But they increased that spending by an average of over 25 percent year on year. That growth is concentrated in a few industries, including computing & electronics (60 percent), automotive (13 percent), and industrials (5 percent). This year, two Chinese companies made it onto the list of the 1,000 biggest innovation spenders: PetroChina and China Petroleum & Chemical.

For China, this increase is in line with the government's own goals of boosting innovation spending as a percentage of GDP from 1.42 percent today to 2 percent by 2010, in hopes of spurring the country's move toward a knowledge-based economy. Today's figure already represents an increase from just 0.69 percent in 1998.

But innovation spending doesn't necessarily translate into actual innovation. This year's study — like those from earlier years — found no statistically significant relationship between R&D spending and measures such as increased sales and earnings, profit, or total shareholder returns. Booz Allen did see better performance from companies that tailor their innovation to suit their corporate strategy, however. Likewise, companies that engage customers throughout the innovation process also report greater success, including operating income growth that's three times that of companies that focus less on customer feedback.


Growth rates of R&D spending and intensity by region


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