R&D spending

I started to think about Vietnam and R&D with the announcement that VinGroup is building its own smartphone (with help from foreign partners). And I was hoping that this is a trend in Vietnam, companies really research and developing their own products rather than just selling commodities or other people’s products.

Plus, in my mind, R&D spending is key to competitiveness, productivity gains and economic growth. If you think of economic growth as being driven by just two things: population growth and productivity growth, then R&D spending can be key to the latter. But then I started to wonder if that is really true, so I worked backward and tried to find something to back up my ill-formed opinion. I quickly found this:

VIETNAM LAGS THE PACK, EVEN AMONG OF DEVELOPING COUNTRIES. SOURCE: WORLD BANK

The panel data analyses show that for the OECD countries examined in the study an increase of one percentage point in R&D expenditure in the economy as a whole results in a short-term average increase in GDP growth of 0.05 percentage points. The time series models for Germany exhibit an even stronger effect that is almost three times as high in the preferred specification.

So it’s real. And it is important. I remember in grad school, a foreign professor said that he thought the US would stay on top is because they invested so much in R&D. And it’s true. The United States spent 2.7% of its GDP on R&D in 2016. Because the economy is so big that equates to USD511 billion. That’s 30x Sweden, which is #10 in total spending.

In Asia, there are a number of countries that are extremely aggressive in their investments into R&D, even going back many years. For example, South Korea in 2016 spent 4.2% of GDP on R&D (that’s almost $60bn). That’s #5 in the world in total spending (in current USD, so doesn’t account for purchasing power parity). But even going back to 1996, South Korea has been a consistently high spender on R&D - it was 2.3% at the time, albeit in a much smaller economy. But that 2.3% probably paid the salaries of a lot of Korean scientists!

Sadly, looking at Vietnam, the figures are not pretty. In 2015 (the latest data point available), Vietnam spent just 0.4% of their GDP on R&D, or just USD852m. Even at purchasing power parity, it is something like USD2.5bn or 1/200th of the US’ spending. Malaysia spends 3x as much as a percentage of GDP(1.3%) and even more in absolute terms, Thailand is also higher (0.6%), and so is Egypt (included here because I have a soft spot for the country, and it seems similarly situated in some respects). Only Indonesia and the Philippines are behind Vietnam.

These numbers are a few years old (mostly 2015 for the developing countries). Vietnam, in particular, has seen significant growth, lots of FDI, and even some national players trying to really upgrade their systems (the aforementioned Vingroup). But they really need to be much higher to drive lots of long-term economic growth.