Chinese R&D spending – part 2

Earlier this week, I posted a piece on Chinese R&D spending. OECD’s latest R&D outlook showed China as the number two spender – now ahead of Japan. This morning I got an email from the Council on Foreign Relations that reads as follows:

China has just overtaken Japan as the world’s second-largest spender on research and development, the Organization for Economic Cooperation and Development reports — and its efforts are furrowing brows abroad. Yet spending alone might not be enough to overcome China’s deep structural problems in this area. As George Gilboy pointed out in Foreign Affairs two years ago, China has traditionally imported technological processes wholesale, without investing in long-term capabilities of its own, and it has yet to develop a domestic R&D network linking innovative local firms, universities, and research centers. In other words, China is extremely dependent on technology from industrialized states and that could limit the country’s growth down the road.

My problem is that I’m not sure the editors of Foreign Affairs get it. Things are moving very quickly in China. As I quoted in my earlier posting, according to Dirk Pilat, Head of the OECD’s Science and Technology Policy division:

some multinationals were beginning to move genuine research to China because of the high numbers of skilled scientists they could recruit in Shanghai or Beijing. “There are some signs that they are starting to do fundamental or breakthrough work in China,” he said.

Other indicators confirm the same message: China is rapidly ramping up their indigenous technological capabilities. The same can be said for their design and product development activities. [Plug: Athena Alliance will be co-sponsoring a conference next spring with the National Academies, the Wilson Center and others on the globalized R&D in China and India. More on this later.]
This is not to say that China is immediately going to become a technological superpower. But they are certainly on the path to a higher level of development – sooner rather than later. And I certainly can not agree with the statement in that essay of two years ago – Foreign Affairs – The Myth Behind China’s Miracle – George J. Gilboy that:

China’s own choices along the road to global economic integration have reinforced trends that favor the continued industrial and technological preeminence of the United States and other advanced industrialized democracies.

I fail to see how China’s push for a higher level of economic development reinforces the current technological preeminence of the developed countries. The notion that some have of a world of “invent here – make there and we collect the royalties” is a chimera. The China of the future will be as one of those preeminent technological and industrial nations. They are not destined to be simply the contract manufacturer of cheap consumer goods. How the global economic system adapts to that reality in a manner which benefits everyone is the key issue in international economics today.
The essay makes a number of good points about the weaknesses of the Chinese economy and about the differences between Chinese companies and multinationals operating in China. Whether or not it is out of date and whether the essay’s conclusion about China’s future is correct, I ‘m skeptical. Those are questions that everyone who reads it can decide for themselves. I do know that many things are moving quickly in China, so yesterday’s thinking may not be applicable to tomorrow.
This is one of those areas where the cliché is appropriate: stay tuned.

Chinese R&D spending

And speaking of R&D spending (see yesterday’s posting), here is news about R&D spending in China – China will become world’s second highest investor in R&D by end of 2006, finds OECD:

China will this year for the first time spend more on research and development (R&D) than Japan and so become the world’s second highest investor in R&D after the United States, according to OECD projections based on recent trends.
“The rapid rise of China in both money spent and researchers employed is stunning,” said Dirk Pilat, Head of the OECD’s Science and Technology Policy division. “To keep up, OECD countries need to make their research and innovation systems more efficient and find new ways to stimulate innovation in today’s increasingly competitive global economy.”
Based on recent trends, China will spend just over USD 136 billion on R&D in 2006, just over Japan’s forecast USD 130 billion. The United States is predicted to remain the world’s leading investor in R&D in 2006, spending just over USD 330 billion. The EU-15, which includes France, Germany and the UK, is predicted to spend just over USD 230 billion.

According to the Financial Times:

Mr Pilat said that the bulk of the spending in China was on development work, to alter products for the fast-growing Chinese market, rather than basic scientific research.
The number of patents coming from China that were registered with the patent office in the US, Europe and Japan is still low and a string of recent scandals over academic fraud have also raised questions about how well the money is spent.
But Mr Pilat added that some multinationals were beginning to move genuine research to China because of the high numbers of skilled scientists they could recruit in Shanghai or Beijing. “There are some signs that they are starting to do fundamental or breakthrough work in China,” he said.

Not completely surprising, given all that I have been hearing about foreign companies investing in China and the Chinese government ramping up its own investments. But I would raise the same points as were raised yesterday: R&D spending does not automatically translate into business success. Nor do these surveys capture informal research.
OECD collects two sets of relevant statistics from nations: S&T statistics and innovation statistics. [Note that OECD simply collates the numbers. The actual statistical work is done by the national statistical agencies using OECD guidelines: the Frascati Manual for S&T and the Oslo Manual for innovation]. Chinese S&T statistics are considered relatively good. However, as far as I know, China (like the US) does not yet collect innovation statistics. The US is moving toward that goal (finally). I can only assume that the Chinese are as well. When we have that data (from both the US and China) we will be in a much better position to understand the competitive dynamics.

Innovation, patents and R&D

Does R&S spending lead to better profitability? No, according to a study released last month A Select Set of Companies Sustain Superior Financial Performance While Spending Less on R&D Than Their Competitors:

A select group of the world’s 1,000 largest corporate R&D spenders perform significantly better than their competitors over a sustained period while spending less on R&D than their industry rivals, according to management consulting firm Booz Allen Hamilton’s second annual global innovation study. The study found that although R&D spending of these 1,000 companies rose last year by more than $20 billion, money simply can’t buy effective innovation.

The bottom line finding is that more R&D money is not the answer to innovation. The quality of the research and the business operations that turn the research into products is far more important – what they call High Leverage Innovators.

These High-Leverage Innovators use many different models and approaches to outperform their competitors, but are generally noted for their distinctive skill in at least one element of the innovation process and are adept across all of the stages. Google, for example, is known for generating new ideas with blistering speed. Toyota excels at developing its products and processes far more efficiently and effectively than most other companies. And Apple is noted for its well-honed capabilities in project selection and customer understanding.

Much has been made of one of the findings of the study (as quoted in Business Week):

The second annual study examines the link between R&D spending and business performance, and it suggests that some long-held beliefs about R&D and innovation are wrong: for example, that a bigger R&D budget tends to deliver more patents—a common metric for measuring innovation. In fact, there’s no correlation between the number of corporate patents and financial performance.

This statement is true as far as it goes. But this misses the key points of the study:

Companies are getting better at squeezing benefits from their R&D spending. Although R&D spending by the Global Innovation 1000 rose last year by more than $20 billion, revenues rose at an even faster rate. Indeed, the most meaningful indicator of innovation investment, R&D spending as a percentage of sales, has decreased steadily since 2001, and by that measure, only 40% of the companies actually increased their spending rate in 2005.
Deep pockets can be dry wells. Analysis of the 2005 Global Innovation 1000 confirms the major finding from our initial study last year: Money simply cannot buy effective innovation. There are no significant statistical relationships between R&D spending and the primary measures of financial or corporate success: sales and earnings growth, gross and operating profitability, market capitalization growth, and total shareholder returns. Gross profits as a percentage of sales is the single performance variable with a statistical relationship to R&D spending.
Bigger can be better. Scale provides advantages to R&D spenders. For the largest 500 companies, median R&D spending was only 3.5% of sales in 2005, compared with 7.6% for the 500 smallest firms.
Patents generally don’t drive profits. Boosting R&D spending can increase the number of patents that a company creates, but there is no statistical relationship between the number or even the quality of patents and overall corporate financial performance.
One size does not fit all. R&D budget levels vary substantially, even within industries, which suggests there’s no consensus on the right level of innovation investment, since companies are using a range of different innovation business models.
Effective innovators excel at four key elements. The high-leverage innovators distinguish themselves not by the money they spend, but by building strong capabilities in the four principal elements of innovation: ideation, project selection, product development, and commercialization. High-leverage innovators listen closely to their customers across the entire innovation cycle. Companies such as Stryker and Black & Decker design their innovation strategy around a keen understanding of their end customers’ needs.

For me, a key finding is the “one size does not fit all”. In some case, there is a clear link between R&D and product development, such as in pharmaceuticals. In fact, drug giant Pfizer recently conducted a dog and pony show for analysts and investors touting its R&D and drug pipeline. In other industries, informal research is much more important. If I have a criticism of the study, it would be on its failure to look at informal research spending.
I also have a concern about the use of patents as a metric of innovation. I am not surprised by the finding that patents don’t drive profits. My friends in the patent sales game hate this finding. And there is a counter-finding by Ocean Tomo that patent rich companies outperform others. But, as was emphasized at a recent conference on patent monetization, a patent has little value until it is “baked” into a product. What counts is the product development process, which often but does not necessarily include patents.
The Booz Allen Hamilton may be embraced by some and critiqued by other. I hope it will at least shake up this linear model that we have of R&D spending leads to patents lead to innovation. As the song goes, “it ain’t necessarily so.”

Reactions to financial report

Earlier this week I discussed ongoing efforts to look at US financial markets. Yesterday, a private group, the Committee on Capital Markets Regulation, released its interm report with a number of recommendations. The recommendations were generally in line with what others, including the Secretary of the Treasury, have been talking about.
Reaction in some quarters has been unusually swift, with some questioning the link between the study and its funding from corporate interests. But the real interesting reaction came more on the substance of the findings, as reported in today’s Wall Street Journal

“Some of the specific suggestions are valuable, but the approach goes wrong in focusing so heavily on competitiveness when there is also much that needs to be done to better protect investors and assure the integrity of those who oversee and manage America’s largest corporations,” said former Treasury Secretary Lawrence Summers. “I hope the Bush administration will focus as intensely on helping the American manufacturing, American agriculture and American health-care industries as it is on this particular aspect of financial services.”
While many of the recommendations would require regulatory adjustments, some would require legislation and some lawmakers were skeptical yesterday about the need for broad changes.
Sen. Christopher Dodd (D., Conn.), who is expected to be chairman of the Senate Banking Committee next year, didn’t stake out a position on any of the recommendations but suggested he might not support sweeping change. “While we have an obligation to ensure that our legal and regulatory system helps to foster growth and promotes innovation, we must not damage the fundamental rights and protections that underpin the investor confidence critical to the success of our capital markets,” he said in a written statement.
New York state’s attorney general, Eliot Spitzer, who has taken the lead on several financial service investigations — often outpacing the SEC — lambasted the committee’s recommendation to limit how and when state law-enforcement can pursue cases against financial institutions as “absurd.”
Under the proposal, states could pursue actions if the SEC chose not to, but would be required to notify the SEC of its actions and permit the SEC to have a final say on any settlements that include a structural remedy of national importance. The committee also suggests the Justice Department have the ability to sign off on all state indictments of auditing or financial firms with national clienteles.
“To eviscerate the power of the one set of regulators who did anything is absurd,” said Mr. Spitzer, who will become New York’s governor in January.

Interesting. I especially liked Larry Summers’ challenge to the Administration to come up with a broader strategy. Should make for a lively discussion next year.

“Good” versus effective design

Good versus effective. That is the question facing the design community – at least in the UK after a recent awards ceremony – Rewarding Design’s Bottom Line:

The Design Effectiveness Awards, run by Britain’s Design Business Assn. (DBA) and announced Nov. 27 at a swanky black tie dinner at London’s Hurlingham Club, attempt to sidestep the ego-technics by concentrating instead on practical business measures. These awards don’t claim to be about “good” or “bad” design.
Instead, submissions are considered in conjunction with cold, hard facts: measurements such as gross margin, increase in market share, share price, and market penetration. And, in contrast to many other design awards, the judging panel itself comprises only those from the client side; commissioners from organizations including Fujitsu, the Orient Express, and Britain’s National Health Service.

So far so good. Here comes the problem:

The overall Grand Prix was awarded to beer manufacturer Foster’s for its “waterfall” packaging for cases of cans or bottles sold in supermarkets. Impressed by an increase in market share to 29% from 23.7%, the judges considered that the project demonstrated all the qualities necessary to take the sought-after prize for “best in show.”
“With what appeared to be no other variable than the design of the pack, sales shot up far faster than the growth of the market,” says Raymond Turner, judging panel chairman and a design-leadership consultant. “It showed an intelligent use of design to help to reposition a product with which people had become familiar. It’s an excellent example of design working with demonstrable success.”
Unfortunately, it’s also a rather ugly piece of design. And here’s where the intra-industry muttering and grumbling begins, and the claims of not caring whether or not something is “good” or “bad” design run into trouble. After all, what message does giving Foster’s the “best in show” accolade send to the business community at large? Should a design organization really be ignoring the basic principles of “good design” in order to prove to the business community that it should be taken seriously?

Well then, what is the purpose of design — aesthetics or effectiveness? For the bottom line folks, effectiveness is what matters — and aesthetics is in the eye of the beholder. If it works, who is to say what is good or not.
On the opposite side are those who question whether one should go for the lowest common denominator – which is often the best way to improve effectiveness. Case in point: negative political ads. We all hate them. But politicians keep using them because they seem to work.
I guess I have to question the whole premises of the award. If the sole criterion was effectiveness, then the award misses the point. Design should be about the elegance of the solution, not just the solution itself. Form and function. The award should go to those who can do both – not just one or the other.
Maybe they need to rethink the award.

Design in India and the UK

Two quick notes on what other nations are doing in the area of design.
First, from India where there will be a major design conference next week:

The conference is the first amongst a series of events being planned to bring together people who share an interest in addressing the challenges and opportunities of designing with India. It is proposed that individuals from diverse fields, who have unique perspectives on the role of design and innovation within the context of India’s participation in the global economy, will share their vision with the attendees.
. . .
The conference will be particularly beneficial for those who are in the process of establishing partnerships in India. The event will inspire the conceptualization of meaningful products and brands for the Indian marketplace, as well as help integrate Indian design sensitivities into an emerging eclectic design ethos that is fast becoming the defining characteristic of products and brands that will succeed in the global economy.

Sponsored by the Confederation of Indian Industry, this conference is part of a larger effort to put India on the global design map.

And from the UK comes word of a new research project on design – CRIC Project – Markets for Creativity: Design Services & Innovation:

This project concerns the role of design consultancies in innovation. Relative to R&D, design has received little attention from innovation scholars. Yet appreciation of the importance of design for UK firms has steadily increased in recent years and is now seen as key especially to low-technology businesses and SMEs, which account for most of the UK economy, as recently reflected in the Cox Review and the parallel study on Design and Creativity in Business Performance by the DTI. The UK design consulting industry is growing – and changing – fast. It comprises over 4,000 firms, with a gross income of £4 billion, including £0.5bn from overseas. Employment in the sector has more than doubled from the mid-1980s and both the technologies and the skills required in the competitive process have changed dramatically since then. Also it client base has expanded and transformed and is now highly diversified.

So, where are the American programs and research projects? Or is our official policy one of simply assuming the US competitive advantage in design will always remain?