Why R&D Spending has Almost No Correlation to Innovation

A newly released infographic by Visual Capitalist shows that while the US leads in the amount of dollars spent on research and development ($463 billion), it only came in fourth place with the percentage of GDP spent on R&D (2.79 percent), just over half of the GDP percentage invested by South Korea. Beyond Korea, the US is trailing Japan and Germany.

Note that the infographic only includes select G20 countries. Once non-G20 countries are added to the mix, another country jumps to first place–Israel. With 4.3 percent of its GDP invested in R&D, it surpasses South Korea. Other non-G20 countries that occupy the top 10 spots include Finland, Sweden, Austria, Denmark, Taiwan, and Switzerland, pushing the US down to the 11th place.

Another perspective on R&D investment is R&D expenditure per capita. In that list, Singapore is at the top (with $1,832 per capita), followed by Switzerland, South Korea, Sweden, and Denmark, with the US occupying the 6th place with $1,443. Israel drops to the 10th place with $1,362.

Why you shouldn’t be alarmed

In a previous article, I analyzed Apple’s investment in R&D as a possible indicator of how innovative the company might be. In the first year that the Boston Consulting Group (BCG) ranked Apple as the most innovative company in the world, 2005, Apple’s revenue increased 68.3 percent and its profit increase 383 percent compared to the previous year, while the company’s investment in R&D only increased 9.2 percent. That 68.3 percent revenue growth is phenomenal, considering that Apple had already generated $8.3 billion the year before.

However, in 2016, Apple’s revenue declined 7.7 percent from $234 billion to $216 billion. Its profit declined even faster, by 14.4 percent. At the same time, Apple’s R&D investment actually increased from $8 billion (3 percent of sales) in 2015 to $10 billion (5 percent of sales) in 2016. Apple’s investment in R&D increased 25 percent year over year, while revenue declined.

In fact, Apple’s R&D investment grew by more than 30 percent in each of the previous 7 years.

The conclusion is simple: investment in R&D is not the same as innovation. The percentage of revenue (or GDP) that a company (or country) invests in R&D is not a clear indication of how innovative that company (or country) is. You don’t have to worry about South Korea or Israel outspending the US (as a percentage of GDP) in R&D. The focus should be on how innovative the US is.

Additional insights

Additional insights from the new infographic show that the G20 countries account for 92 percent of the global spending on R&D. 94 percent of the patents granted by the U.S. Patent and Trademark Office are originated in those G20 countries. I guess the rest are coming from Israel…

The data for this article was retrieved from OECD, and the World Bank.

image credit: visualcapitalist.com

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Dr. Yoram Solomon is an inventor, creativity researcher, coach, consultant, and trainer to large companies and employees. His Ph.D. examines why people are more creative in startup companies than in mature ones. Yoram was a professor of Technology and Industry Forecasting at the Institute for Innovation and Entrepreneurship, UT Dallas School of Management; is active in regional innovation and tech transfer; and is a speaker and author on predicting technology future and identifying opportunities for market disruption. Follow @yoram