Rationalising R&D investment for next phase of growth

What are the development options for natural resource-poor, densely populated countries? Of course, human competence is the answer. Naturally, in less developed countries, the process begins with the commercialisation of labour. With the given local and international market, commercialisation of labour may cause such countries to graduate from hunger to low middle-income status. The next target for sustaining growth is creating economic value from knowledge and ideas. Such countries are advised to borrow and make investments in education and research. There is thus an urgency to rationalise R&D investment to realise the new growth phase.

The belief in R&D investment for creating jobs for graduates and driving economic growth has reached so high that even high-school students in public rallies have been asking such a question. Furthermore, notable economists like Nobel laureate Paul Romer firmly believe in the new growth model, terming ideas as an endogenous factor. Such theories tend to promote the notion of a natural correlation between R&D investment, idea production, and economic growth.

Of course, there is a reason. Compared to South Korea's steady growth in R&D spending as a percentage of GDP from 3.98 in 2015 to 4.93 in 2021, in most less developed countries, the R&D spending is around 0.1 per cent of GDP. Not only in South Korea, R&D spending in advanced economies is very high, varying from 2 per cent of GDP to as high as 5 per cent. Does it mean that if less developed countries start increasing R&D investment, their next phase of economic growth will ramp up, propelling them to high-income status? To get a lesson, let's look into a few examples.

The USA: Before 1899, there were no R&D jobs in corporate America. The US government was not directly involved in investing in R&D to create high-income employment and drive economic growth. However, the scenario started to change with Edison's success in engaging university graduates to fine-tune his trial-and-error-led invention of the incandescent light bulb. The demonstration of generating profitable revenue from knowledge and ideas created through systematic investigation (R&D) led to inspiring corporate America to invest in R&D to drive profit. Consequently, R&D investment became a new corporate strategy for generating profit, creating high-paying jobs, and driving economic growth. Upon observing the further role of R&D during the Second World War, the US government organised systematic R&D capacity to improve national security, create high-paying jobs, and drive economic growth. It's worth noting that the demonstration was a precursor for scaling up an R&D-led national development programme.

South Korea: In the early 1960s, there were no R&D jobs for PhD degree holders in the South Korean industry. Mostly, South Korea was busy exporting labour to the global value chain of textiles, shoes and electronics. However, upon realising the necessity of exporting knowledge and ideas, the South Korean government took the lead in demonstrating how the industry can take advantage of R&D to improve processes and products so that idea trade can begin. Upon observing the profit-making opportunity of R&D investment, the South Korean industry started investing in R&D. Hence, since the early 1970s, South Korea's R&D investment and industry share have been steadily growing. However, South Korea established particular institutions for licensed technology refinement to scale up the initial demonstration. One of the notables was the Korea Advanced Institute of Science & Technology (KAIST). Besides, there have been several institutions and programmes for understanding the global industrial dynamics, detecting entry opportunities, developing strategies, and formulating policies. 

Apple: During the launching year of the iPhone, Apple's annual R&D spending was $0.8 billion. However, the iPhone offered the opportunity to profit from R&D investment through releasing successive better versions. Hence, Apple's R&D investment has been accelerating since the iPhone launch, reaching over $29 billion in 2023. However, till 2021, Apple was successful in leveraging R&D to increase the price of successive releases of the iPhone and making growing sales. However, in 2023, despite ramping up the R&D budget, Apple could not increase the price of the iPhone. Due to maturity and growing competition, Apple's ability to profit from R&D investment has been shrinking. Hence, to profit from R&D, a suitable pathway should be detected and created. And such a pathway does not offer endless opportunities-demanding the finding of the next wave.

Google: Google is one of the top R&D investors. Over five years, Google invested $100 billion, culminating in $40 billion spending in 2022 alone. Does it mean that Google has proportionately succeeded in profiting from it? Unfortunately, along with R&D spending, the idea-corpse in Google graveyard has also increased, reaching 293 in 2023. In incubating and nurturing these ideas, Google's billions of dollars investment could not result in profitable revenue, giving a lesson that R&D investment alone is insufficient.

Despite the macro level correlation between R&D investment and economic status, idea-based Romer's growth model, and common belief, there has not been a natural correlation between R&D investments. Hence, the barrier to graduating to the next phase is not only about the R&D investment less developed countries need to make. It's worth noting that the demonstration of a few less developed countries undertaking mega projects for infrastructure indicates that these countries are in a position to make substantial investments in R&D. Perhaps there has been a growing readiness to ramp up R&D spending in these countries.  

It appears that increasing R&D investment is very much within the reach and development agenda of a few less-developed countries. They exhausted their low-cost labour advantage to reach the low middle-income status. Besides, they have ramped up university count and enrollment. Furthermore, by referring to human capital theories, the Romer growth model, data on advanced economies, and total factor productivity, economists and other experts strongly favour boosting R&D investment. However, the challenge lies in profiting from such spending.

As shown in the examples, the path to profiting from R&D investment must be chalked out first. It requires understanding the global dynamics, migration of innovation epicentres, unfolding opening and closing of opportunity windows, and making rational decisions. Without making adequate progress in understanding the dynamics of turning R&D investment into profit and developing rational decision-making capability, any amount of R&D investment runs the risk of being wasteful. On the other hand, crafting a suitable pathway may open an endless growth opportunity for profiting from R&D investment-propelling aspiring low middle income countries into high-income status.

Rokonuzzaman, Ph.D is academic and researcher on technology, innovation and policy.
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