When it comes to research and development (R&D) spending, we Americans can proudly chant, "We're No. 1!" Until recently, the Japanese could only slightly less proudly chant, "We're No. 2!" No more.
According to Michael Mandel in the BusinessWeek blog Economics Unbound, "A new report from the OECD [Organisation for Economic Co-operation and Development] says: China will this year for the first time spend more on research and development ... than Japan and so become the world's second highest investor in R&D after the United States...." Russia occupies the No. 4 spot.
Mandel added that the number of Chinese researchers has surged by 77% between 1995 and 2004, to a total of 926,000. The U.S. boasts more than 1.3 million researchers.
China's total R&D spending for this year is expected to be about $136 billion, up 20% from year-ago levels. The U.S. spends about a third of a trillion dollars on R&D, or roughly $330 billion.
What does this mean?
Well, it doesn't mean that China will surpass America within a year or two, quickly becoming the world's leader in innovative technology. (Though that might happen a little further down the road.) For one thing, part of this increase is tied to foreign companies moving some of their research operations to China. And much of the kind of research being undertaken in China is tied to developing items for domestic consumers, not to working on scientific breakthroughs.
Still, keeping an eye on R&D spending can be an interesting exercise for investors. R&D spending is good for business, leading to new products and services and boosting the economy. This bodes well for China -- and for those interested in investing in it. (If that's you, I encourage you to take a free test-drive of our brand-new Motley Fool Global Gains newsletter, which aims to deliver the world's best investment ideas to its subscribers.) It bodes well for Russia, as well.
Investors might also be Foolish to examine the R&D spending of individual companies, tracking how it changes over time and comparing it to the expenditures of its rivals. Ideally, you'll want to see it growing, perhaps in line with revenues. Dell (NASDAQ:DELL), for example, has had relatively flat R&D spending over the past few years, at roughly $460 million each year. Hewlett-Packard's (NYSE:HPQ) spending has also held steady, at approximately $900 million each quarter. HP's higher spending doesn't necessarily mean it's the best bet, of course; that all depends on what the research produces.
Indeed, a Booz Allen Hamilton study from 2005 found that hiking R&D spending doesn't necessarily lead to better performance. It noted:
- There is no statistically significant difference between the financial results of average and above-average R&D spenders (with a few exceptions like Apple, No. 148 on Booz Allen's list).
- Research related to computing & electronics, health, and the automotive sector commands 63% of the total spending on innovation.
- Companies' individual investments in R&D ranged from $39 million to Microsoft's (NASDAQ:MSFT) $8 billion.
Booz Allen concluded that it all comes down to the process: "Superior results seem to be a function of the quality of an organization's innovation process -- the bets it makes and how it pursues them -- rather than either the absolute or relative magnitude of its innovation spending."
Longtime Fool contributor Selena Maranjian owns shares of Microsoft. Microsoft and Dell are Inside Value recommendations. Dell is also a Stock Advisor pick. The Motley Fool has a full disclosure policy.
