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.