Economic crisis and weak outlook hit innovation

Business spending on research and development has been hit hard by the economic crisis, with nearly all OECD countries seeing a fall in investment which could impact innovation and long-term growth, according to a new OECD report. The Science, Technology and Industry Outlook 2012 says that business spending on R&D fell a record 4.5% in 2009 in the OECD countries. Only France and Korea bucked the trend.

Government R&D spending only partly offset the fall in business investment. The report indicates that the current weak economic recovery will likely lead to continued sluggish growth in R&D spending by firms, notably in Southern and Eastern Europe, in the foreseeable future. The outlook for France, Germany, the United Kingdom and the United States is also uncertain, according to the report.

Spending by Asian economies, such as China, India and Korea, on the other hand continued to increase during the crisis. Year-on-year growth in R&D investment by firms in 2010 was 29.5% in China and 20.5% in Korea and India.

Sectoral differences

Some sectors coped better than others. Sales declines for large high-technology firms in industries areas such as aircraft, IT hardware and medical equipment, were much lower than in medium-technology industries such as automotive manufacturers. Large software and healthcare firms also continued to increase R&D investment during the crisis.

Enterprise creation and venture capital investment have yet to return to pre-crisis levels, increasing unemployment and hurting innovation. While skilled workers have been less hard hit than low-skilled workers in the jobs crisis, long-term unemployment has risen among skilled workers, notably in Estonia, Greece, Portugal, Spain, Ireland and the United States.

In fast-paced sectors such as biotechnology, aeronautics and IT, a long spell of unemployment can cause people to lose touch with the latest technologies and weaken their human capital.

Low local demand and difficult financing may also accelerate the trend of companies relocating R&D and manufacturing abroad to take advantage of growing Asian markets.

Government spending

Government R&D spending partly offset the fall in business investment, as many governments devoted a substantial part of their stimulus packages to support R&D and innovation. Government R&D spending as a share of GDP was 0.82% in 2009, up from 0.78% in 2005.

During the crisis, some countries strengthened their support for public research institutions and educational programmes, including Australia, Canada, China, Italy, Switzerland and the United States. Estonia, Germany and Sweden boosted investment in existing programmes to support innovation.

The outlook for public spending on innovation varies widely across the OECD. Greece, Ireland, the Slovak Republic, Slovenia and Spain foresee a decrease in government spending on R&D in the coming years. France, the United Kingdom and the United States expect to maintain their current spending levels. Others, including Chile, Denmark, Germany and Turkey plan to boost spending in the short-term.

Link: The OECD Science, Technology and Industry Outlook 2012