New report: The new geography of global innovation

While the US and Japan remain leaders in global science and technology innovation, increased competition from growth markets, notably China, suggests a changing landscape. According to a new report by the Global Markets Institute at Goldman Sachs, research and development spending in Asia surpassed EU levels in 2005, and is likely to overtake US levels in the next five years, thanks primarily to striking growth in R&D investment in China. The new geography of global innovation is further supported by the globalization of higher education, particular in science and engineering (S&E) fields.

Measures of R&D intensity, or R&D investment as a share of GDP, allow for cross-country comparisons of commitment to R&D. R&D intensity has remained flat across G7 markets during the last decade at 2.1%. In China it has impressively doubled as a share of GDP since 1999, reaching 1.5%, which remains low by international standards.

R&D investment is driven largely by the corporate sector, which finances more than two-thirds of total R&D spending in many countries. Companies in a range of industries, from pharmaceuticals to technology hardware, have exposure to new hubs of global innovation.

Pipeline concerns and the role of human capital

The new geography of global innovation is critically dependent upon higher education in science and engineering (S&E) fields. Student interest in S&E is low in G7 countries, suggesting that these markets are likely to have difficulty replacing an aging cohort of native-born scientists and engineers. Reliance on foreign-born skilled labor is set to rise further as the world’s S&E skill base shifts toward Asia, notably China, where S&E fields represent 40% of all new university degrees awarded (more than two and a half times US levels).

New geography demands a policy response

Innovation-led productivity growth in the G7 will increasingly require public policies which attract and retain skilled foreign students and workers. In the short term, a more flexible and talent-friendly immigration regime can help developed economies and companies to benefit from the globalization of S&E skills. Longer-term investments in R&D and science education can further enable G7 countries to remain competitive by rebuilding student interest in S&E fields and by expanding the domestic supply of skilled S&E labor.

By Douglas Gilman, Goldman Sachs & Co.

About the Global Markets Institute at Goldman Sachs

The Global Markets Institute is the public policy research unit of Goldman Sachs Global Investment Research. Its mission is to provide research and high-level advisory services to policymakers, regulators and investors around the world. The Institute leverages the expertise of Research and other Goldman Sachs professionals, as well as highly-regarded thought leaders outside the firm, to offer written analyses and host discussion forums.

About Douglas Gilman

Douglas Gilman joined the Global Markets Institute as an Associate in 2007, upon completion of an M.Phil. in International Relations at the University of Oxford. From 2003 to 2005, he served as an Analyst in the Special Execution Group within the Investment Banking Division at Goldman Sachs. Prior to joining Goldman Sachs, Douglas worked with the Council on Foreign Relations and the House of Commons (UK), where he served as a Hansard Scholar and Research Associate, working closely with the Shadow Chancellor of the Exchequer. Douglas received his B.A. in International Relations and Political Science, with a certificate in Business and Public Policy, from the University of Pennsylvania (Phi Beta Kappa and summa cum laude), and his M.Phil. from the University of Oxford, where he was a Gilbert Murray Trust Scholar and a Roger Short Memorial Scholar. His research interests include global economic governance, institutional accountability and theories of regulation. Douglas has written on these and other topics in various journals.
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