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STRATEGY

China's Spending on Research and Development Growing Faster than U.S.

While the United States still has a bigger share of the global R&D market, second-ranked China is gaining ground.
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U.S. companies are falling behind on research-and-development spending, while their Chinese counterparts have upped their investments in recent years, according to a new report.

The study, conducted by R&D magazine and Battelle, a Columbus, Ohio-based research firm, could spell trouble for small businesses that benefit from local R&D activity.

This year, the United States is responsible for 32.4 percent of global R&D, but that number is down slightly from 32.7 percent in 2005, and is expected to drop to 31.9 percent in 2007.

China ranks second for most dollars spent, and while it's only responsible for 13.4 percent of the world's R&D, Battelle projects that number will rise to 14.8 percent in 2007. The percent changes may be small, but on a global scale, they translate into large figures -- R&D magazine reports that global spending on R&D topped $1 trillion in 2006.

"There still is a considerable gap, but it's closing," Jules Duga, a senior Battelle research scientist and co-author of the report, said in a statement.

Chinese growth has been fueled by the liberalization of Asian economies and the ongoing development of a highly educated, technology-oriented population, according to Battelle.

The report explains the results in terms of an evolution in international competition: After the global arms race subsided, focus shifted to a "hands race" for lower-cost manual labor. Now shifting once again, the world is entering a "head and brains race" for technological advancement.

Falling behind in the "race" could have a negative impact on small businesses in the United States. Earlier research has shown that small-business formation and growth is directly linked to local R&D.

A 2002 study published by the Small Business Administration showed that communities with larger amounts of university R&D activity are home to more start-ups, and those companies significantly benefit from R&D during their early stages of growth.

This is due in large part to a "spillover effect" of knowledge and technology to the surrounding area.

The SBA research found that there is generally a two-year lag between the year of R&D expenditure and the spike in the launch and growth of new firms, during which the spillover takes place. That means that universities, government laboratories, and corporations need to consider changing trends of today in order to protect the vitality of small businesses in the future, according to the SBA

"These challenges can be accommodated only by long-term strategic investment and will," Duga said.




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