Hungry for innovators?

Promoting research and development (R&D) is a highly coveted goal for governments. R&D activities are widely recognised as beneficial to innovation ecosystems, since they create high quality jobs and can lead to technology and knowledge spilling over to local talent and companies.

Attracting innovative foreign companies, therefore, can act as a catalyst for innovation, growth and the development of technology hubs. This prevailing narrative suggests that foreign R&D investment should be welcomed in all its forms by local authorities.

Foreign direct investment (FDI) into R&D activities has expanded in recent years too. Between 2003 and 2018, global capital pledged to foreign R&D operations more than doubled from $18bn to almost $41bn, according to fDi Markets, a greenfield investment monitor. While global R&D investment declined in subsequent years, in 2021 the figure remained above historical averages at more than $27bn.

Despite this seemingly auspicious global R&D environment, there is reason for anyone in investment promotion and economic development to entertain a more nuanced conversation.

Research from the London School of Economics (LSE) and Harvard University indicates that not all R&D activities of foreign multinationals have a uniform positive impact on innovation within host economies.

Riccardo Crescenzi, a professor of economic geography at LSE and co-author of the research, notes that foreign multinationals that embark on R&D at home and abroad “shape innovation across the globe” and can help foster the growth of technology hubs.

He likens the "spillover mechanism" from foreign investment to "pot of water", in which the water represents the knowledge brought by multinational companies.

"External investors arrive to the local economy with this big pot full of water. And in pursuing its activities some of this water will eventually spill out from this pot and benefit the local environment," said Mr Crescenzi in a recent LinkedIn Live event hosted by fDi Intelligence.

But counter to their expectations, their research findings showed that the most innovative multinationals did not bring the largest spillover effects, as explained in the following short clip.

So counter to generally accepted theory, global technology leaders are not the main contributors to local innovation.

“We find that most of the impact from [foreign R&D investment] does not come from the biggest innovators,” says Mr Crescenzi. “Technological giants are so big that they find within themselves most of what they need and have less of an incentive to interact with the local environment.”

Instead, medium-sized multinationals offer higher potential for local spillovers, as they tend to more actively exchange knowledge and implant themselves in local innovation ecosystems. “We measure more collaboration, joint ventures and co-patenting when there are more intermediate companies investing abroad,” says Mr Crescenzi.

The world's top innovators

fDi Intelligence has compiled a list of the top 100 innovation leaders in the world, ranking them based on their spending on R&D in calendar year 2021 (see methodology and table at bottom of article). These figures are complemented by the companies’ annual revenue and R&D expenditure from 2019 to 2021.

A total of more than $628bn was spent on R&D expenses in 2021 by these hundred highly innovative firms, representing an increase of 13.74% on the previous year. This total R&D spend was also more than a fifth higher than the figure recorded in 2019.

For investment promotion agencies (IPAs), charming the world’s top innovators to set up R&D activities in their localities is a good strategy in this vein. Deep pocketed R&D spenders tend to be among the most active FDI investors.

For instance, Amazon has held onto its top spot as the world’s largest spender on R&D. It shelled out a whopping $56bn in 2021, which was up by 31.2% from the previous year. Between 2019 and 2021, the US tech giant was also the most active cross-border R&D investor, announcing 32 FDI projects across 18 countries, according to fDi Markets.

This commitment to R&D has helped the company keep ahead of its competitors across the various industries it operates within, including e-commerce, cloud computing and logistics. There is some debate over the comparability of Amazon’s figures, however, as the company reports them as “technology and content” in its filings.

This is compared to the more common accounting definition of R&D expenses, which typically includes wages for researchers and the costs of operating innovation facilities.

Amazon’s noticeable lead in R&D expenditure compared to other companies may be explained by the fact the cost to operate its cloud computing arm, Amazon Web Services (AWS), is primarily included within these figures.

Nonetheless, Amazon’s 2021 annual report says that it “expects spending in technology and content to increase over time as we continue to add employees and technology infrastructure”, albeit at a slower pace of growth in 2022.

US big tech dominates

More than a quarter of the top 100 innovators spent $7bn or more on R&D in calendar year 2021, according to fDi’s analysis. Companies had to have spent at least $1.5bn on their 2021 R&D expenses to make the top 100 list.

Just under half of these innovation leaders were broadly defined as technology companies, which includes those that sell software, computer services, hardware and equipment. Some 27% of the top 100 were in healthcare, with the majority engaged in pharmaceuticals and biotechnology. The remainder was made up by companies in the automotive (15%), energy and industrials (9%) and consumer goods (1%) sectors.

As was the case in fDi’s previous R&D research in 2020, US big tech companies stand out for their spending. Alphabet, the parent company of Google, was the next largest R&D spender in 2021 with $31.6bn spent across its global operations – a figure 12.3% higher than a year earlier.

“We must continue to invest significant resources in R&D, including through acquisitions, in order to enhance our technology and new and existing products and services,” read Alphabet’s 2021 annual report.

In third place came Meta – which has been the new name for Facebook since the company rebranded itself in November 2021. The social media giant increased its R&D spending in 2021 by more than a third to $24.7bn. Meta spent a higher share (21%) of its 2021 revenues on R&D than any other US-based company featured in the top 10.

This reflects the company’s investments into technology like augmented and virtual reality needed for its bet on the metaverse, a future immersive iteration of the internet.

Meanwhile, fellow Silicon Valley-based Apple spent $23bn on R&D in the twelve months to January 2022, up by 18.5% on the same period a year earlier. Since Apple’s fiscal year ends in October, figures that are the closest comparison possible with the calendar year 2021 were found by summing data from quarterly reports.

Microsoft placed 6th overall with its $20.7bn of R&D investment. Meanwhile, hardware giants were the only two Asian companies to spend more than $20bn on R&D in 2021. Chinese private telecommunications specialist Huawei had $22.1bn of R&D spending, representing about 22.4% of its 2021 annual revenue. In seventh place came South Korea’s Samsung Electronics which spent $20.2bn. The company has overseas R&D centres in countries including the US, India, Israel, Russia and Japan.

Greenfield pitfalls

US big tech firms are among the most sought after companies in the world by IPAs. Their presence in ecosystems often signals to other foreign firms that a location is well suited for developing patentable innovations. They also bring benefits to host economies further up the value chain by sourcing parts and materials needed for their R&D labs from local suppliers.

Research by the European Commission suggests the impact of this kind of inward innovative FDI is more nuanced. It found that foreign greenfield investment, which typically involves the setting up of new R&D labs or expanding of existing innovation facilities, has a negative impact on local patenting.

Giacomo Damioli, who co-authored the European Commission research, says this finding is explained by a “competition effect” on the local inputs for innovation.

“Innovation and patenting is heavily demanding of human capital,” he says, explaining that foreign multinationals often seek to attract talent and knowledge within local ecosystems when making overseas R&D investments.

“In the case of greenfield, there will possibly be a disruption in the local network of inventors,” he says. “Multinational companies are attractive to the most experienced inventors. By removing them from the local network, it can create negative spillovers as younger and less experienced inventors lose collaborators and mentors”.

Thus, the potential for brain drain is something that must be watched carefully when governments assess the impact of foreign R&D investment.

Healthcare spenders

Despite the potential for brain drain, there are many different types of innovative companies requiring different kinds of talent. For instance, pharmaceutical and biotechnology companies, which require teams of scientists to develop new products, were among the highest R&D spenders in 2021.

Some 23 firms featured on the top 100 list, spending a combined total of $154.5bn on R&D expenditure, an increase of 8.5% on 2020, according to fDi’s analysis.

In 2021, Switzerland-based Roche spent $16.2bn on R&D, followed by major US-based drug manufacturers Johnson & Johnson ($14.7bn), Merck & Co ($13.4bn), Bristol-Myers Squibb ($11.4bn) and Switzerland-based Novartis ($11.29bn).

A lot of high spending on R&D in the life sciences sector has come from companies rushing to develop vaccines against Covid-19, as well as other therapeutics for other existing diseases. UK-based AstraZeneca, which developed a Covid-19 vaccine, increased its R&D spending in 2021 by 62.5%, compared to the previous year. Meanwhile, US-based biotech Vertex Pharmaceuticals increases its R&D spending by 66.7% in 2021.

Automotive transition

Not all R&D operations are the same by nature. Automakers can have both electronics- and software-focused innovation centres, as well as large engineering based R&D facilities on production campuses.

Germany-based Volkswagen was the only automotive manufacturer to make it into the top 10 R&D list. The company’s R&D spending rose year-on-year by 12.1% t0 $18.4bn as it pursues its new auto strategy. VW’s strategy aims for it to build up its capability in areas such as software development, autonomous driving and battery technology.

Large R&D spending was seen across the automotive industry as carmakers built up their capabilities in electric vehicle (EV) technology as part of shifting strategies. R&D spending in 2021 at some of VW’s closest rivals paled in comparison, but was still high. This included General Motors ($7.9bn), Ford ($7.6bn), BMW ($7.37bn) and Honda ($7.31bn).

Although EV pioneer Tesla spent far less than legacy automakers on R&D in 2021, with just $2.59bn, this marked an increase of 73.9% from the previous year.

Chipmaking supremacy

Semiconductor companies were again amongst the large spenders on R&D as they continue to develop more advanced computer chips with better processing power and efficiency.

US-based giant Intel placed 10th with $13.56bn of R&D spending in 2021, almost double the amount spent by the next semiconductor company, Qualcomm ($7.45bn). The Santa Clara, California-based company has also been on a spending spree over the last year as it expands its production capacity across the world.

In March 2022, Intel announced plans to invest €33bn ($34.6bn) into chip manufacturing in Europe, while also boosting its R&D functions across the region. Just two months prior, the company set out plans to invest at least $20bn in two chip factories in Colombus, the capital city of the US midwestern state of Ohio.

Other semiconductor companies had significant R&D budgets, such as Nvidia ($5.27bn), Broadcom ($4.85bn) and Advanced Micro Devices ($2.85bn).

While technology companies dominated the top 100 list, there were also multinationals from more legacy industries represented too. This included US-based industrial conglomerate General Electric which spent $3.69bn on R&D in 2021, Chinese state-owned energy giant PetroChina ($3.68bn) and US-based aerospace and defence specialist Raytheon Technologies ($2.73bn).

Swiss food and beverages giant Nestle was the only consumer goods company to make the top 100 with $1.83bn spent on R&D during calendar year 2021. On a geographic basis, US-based companies made up 46% of the list, more than three times as many as China. Meanwhile, European companies made up less than a third of the top 100.

How to manage innovation leaders

There is a tricky balancing act for local authorities when dealing with innovation leaders. While they can have a negative impact on innovation, by taking up the best talent and reducing local patenting, they can equally be crucial in the development of technology clusters.

Mr Damioli recommends for local policymakers to engage actively with incoming companies, including those making mergers and acquisitions (M&As) to ensure there are more linkages with the local community. He says this can help the development of local human resources and minimise leakages.

“Policymakers should try to build a network of relationships that involves M&A in the local community,” he says.

Mr Crecenzi advocates for leveraging existing local resources and infrastructure to reduce the risk of brain drain and foreign multinationals sucking resources out of ecosystems.

“Universities play a big role in innovation ecosystems,” he says. Public policy should focus on reducing the cost for foreign multinationals to interact with local actors, particularly in less developed regions. This is where investment promotion agencies can play a fundamental role too, helping to search and match local suppliers and partners with foreign firms.

While there is no secret sauce in managing foreign R&D within innovation ecosystems, one thing's for certain: company spending and focus on R&D will continue to be a growing pool from which governments can try to foster local economic development.

Total global R&D spending in 2022 is expected to rise by 5.4% to $2.476bn, according to R&D World, which has tracked and forecast R&D for over six decades.

Methodology

This list of world’s top 100 investors in R&D worldwide relies on companies’ latest published annual reports and financial statements for calendar years 2021 and 2020, where data is available. In the case that data was unavailable, or the company’s fiscal years did not end on December 31st, every effort was made to reflect the closest possible comparison through quarterly reports.

In several cases, investment platform YCharts was used to find quarterly figures, which were totalled to make up the full calendar year. For some companies the closest comparable 12-month periods to the full 2021 calendar year ended in either November 2021 or January 2022.

Owing to different national accounting and disclosure practices, depending on the country in which a company is based, some companies are less likely to disclose R&D investment consistently. It is only a legal requirement to publish R&D investment in certain countries. Japanese companies were particularly underrepresented in the analysis owing to a lack of available data on company websites and YCharts.

When R&D and revenue figures were quoted in a foreign currency (e.g. yen, euros or renminbi) on company reports, these were converted into US dollars using the average exchange rate during 2021. There may be discrepancies as a result owing to the differences in exchange rates used by YCharts versus the above method.

Every effort has been made to improve the comparability of the data, but owing to the diversity in accounting practices, exchanges rates and fiscal years between the companies included, this list can be assumed to not be comprehensive.

The R&D spending data included in the top 100 list are R&D expenses. In short, this is the amount of money that a company spends to develop new products and services each year, which includes, for example, the salaries of researchers and the costs of running R&D centres. There is a continuous debate among accountants over whether R&D spending should be treated as an expense rather than an investment.

While R&D operations are global in nature, this data refers to R&D spending reported by the entire company, and thus does not take account of the actual location of the activity.

Other exhaustive research was used as a reference for the top 100 list compiled by fDi. This includes the 2021 EU Industrial R&D Investment Scoreboard, which analysed the 2500 companies that invested the largest sums in R&D in 2020.