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Economic Nationalism Could Disrupt Chem R&D Spending

Posted on November 24th, 2017 by in Chemicals Industry News and Analysis

Thought bubble

Economic nationalism could disrupt how chemical companies spend their research and development dollars – by making investments less efficient and by encouraging firms to spend money in other parts of the world.

Such nationalist policies do not intend to discourage research and development (R&D). They want to increase employment and promote economic growth by limiting immigration and fostering domestic companies.

“But these kinds of policies can have unintended consequences when it comes to R&D,” said Barry Jaruzelski, thought leader with Strategy&, PwC’s strategy consulting business.

Over the decades, multi-national companies have opened R&D centres around the world. These centres rely on the free flow of people, funds and knowledge to flourish, Jaruzelski said. When government policies impede this flow, companies have to reconsider how they invest in R&D.

Some companies may choose to spend more money in foreign countries with more open policies – the very outcome that these nationalist policies intend to discourage.

“So far, the nationalist rhetoric coming from politicians has not been matched by action,” Jaruzelski said.

Nonetheless, the tone of the rhetoric points to more economic nationalism, which could restrict travel, immigration and visas.

“For R&D programmes, such policies can be troubling because companies conduct so much innovation around the world,” Jaruzelski said.

Among the major publicly traded companies, 94% perform R&D in countries outside of their headquarters, according to Strategy&.

“Companies have been doing this for decades and the rationale goes well beyond saving money on the salaries of scientists and engineers,” Jaruzelski said.

Foreign countries have tremendous numbers of talented scientists and engineers, and companies set up R&D centres in these countries to tap into that talent. In some nations like the US, the demand for such talent greatly exceeds the supply.

“You talk to any company in the US, and they just can’t get the number of scientists and engineers, particularly with advanced degrees, that they need,” Jaruzelski said.

Strategy& quoted the National Foundation for American Policy, which listed the percentage of foreign students in the following graduate programmes in the US.

Graduate Percentages

Universities are already reporting a significant decline in international applications, said Strategy&, which quoted a survey conducted in March by the American Association of Collegiate Registrars and Admissions Officers.

“Companies obtain more than just extra scientists and engineers when they open foreign R&D centres. They also gain critical information about foreign markets,” Jaruzelski said.

There are numerous examples of how companies can benefit from being on the ground of important foreign markets.

In many emerging economies, consumers who are adopting middle-class buying habits cannot initially afford large quantities of staples like shampoo. Instead of buying bottles of product that are common in developed economies, they buy small packets.

Companies that do not appreciate these different buying habits would fail to sell their products in quantities that these consumers want to buy.

Given that the fastest growing markets are in emerging markets, that makes it more critical for companies to establish centres in these countries.

Statistics bear out the advantages that companies obtain by having R&D in different parts of the world.

Strategy& periodically studies the R&D spending among the 1,000 largest publicly traded companies in the world. The latest study found that companies that spend at least 60% of their R&D funds outside of their home country earn a premium of 30% on operating margin and return on assets, the consultancy said.

For growth in operating income, the premium was 20%, the study said.

“These foreign centres have proven their worth. If anything starts impeding the free flow of people, ideas or money among these centres, then that will change how companies invest in R&D,” Jaruzelski said.

“Companies may choose to invest in countries where they can maintain that freedom among their R&D centres,” he said.

“They may also spend more R&D dollars on their existing centres to counteract restrictions in the flow of people, money or ideas,” he said.

In other words, the preference towards nimble and interdependent R&D networks could shift to one favouring autonomous hubs, Strategy& says. This would result in more redundancies and duplication, making R&D spending less efficient.

So far, many companies have not experienced pressure to change their approach to innovation in their home countries, according to Strategy&’s recent innovation study. However, of those responding to the study, 25% said they have felt pressure to change either where or how they conduct innovation work.

Close to one-third have run into problems acquiring or keeping R&D talent because of visa or work restrictions.

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All opinions shared in this post are the author’s own.

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