Research and Development – Who are the Global Leaders?
Following on from my recent blog about “Is Manufacturing Coming Back to the US?” one of Morgan Stanley’s Investment guys, Ruchir Sharma, (Managing Director and the head of the Emerging Markets Equity team) has a book out called ‘Breakout Nations’ and in it he says:
“Every Investment idea is right for a while”
He was talking to Fareed Zakaria on his GPS program. Fareed cited that in the 1980’s investing in Japan made you a big winner until the 90’s came around. In the 1990’s it was all about Tech stocks. Then the Tech bubble burst. The Fad for the 2000’s was emerging markets.
And he asked are emerging markets submerging? I was interested mainly because the discussion lead to which countries invest most in R&D, and that is a leading indicator of success for economies worldwide. In fact, the numbers don’t lie. It looks like we may be entering a new phase with different leaders of growth, and it may be the US that becomes the new focus of manufacturing and innovation.
Sharma cited the MSIM Emerging Markets Research, Haver to show that the BRIC countries were slowing their growth, and therefore other economies might take their place on the world stage. Could that be America? Well, his research tells him that Russia, South Africa and Brazil are likely to grow at a similar, or slower, rate than the US at 2½ % or so.
Even studying China, I have to admit that I never looked at China as a debtor nation, but had my eyes opened to the facts. Until about 2007 it took China a dollar of debt to generate a dollar of growth. In the last 5 years it’s taken more than three dollars of debt to generate a dollar of growth. Sharma says not to look just at the central government debt that appears to be low, but look at the total system debt. That’s 200% as a share of GDP. That’s the highest for any developing country in the world. Yes, USA debt is 350% of GDP, but, and that’s a big but, the US per capita income today is many times that of China. So adjusting for that, The US debt issue is not as worrying as China’s.
So the end of the book says that the US is not really such a bad place! Not only does Sharma point out that US dollar share of US GDP has been stabilizing over the past few years (Europe and Japan declining), but the US also seems to be at the leading edge of global R&D.
In the chart we see that the US is in the lead in terms of R&D spending (Courtesy of Bruegel, Information from February 2013, Issue 2013/02). This is reason for optimism for the US. Even though other countries are catching up, the US still leads the way in R&D, partly because the US is the largest economy in the world, but as Sharma says, even as a share of the economy the amount that the US spends on R&D is very high.
Sure, a couple of countries in the world (Sharma cites South Korea and Israel) maybe spend a bit more as a share of GDP, but the US Spends a lot! And sure, there are some negatives around infrastructure spend in the US, but the US spend on R&D is very high. That leads to cutting edge products in the world from places like Silicon Valley and, dare I say it, Cisco Systems! Even compared to Japan, the US remains at the cutting edge of innovation, and Cisco’s product line is a testament to that!
Source: Bruegel based on National Science Foundation data (NSF, 2012). Note: R&D expenditures are nominal, expressed in $, PPP; 2009 data for South Korea estimated from 2008 on the basis of average annual growth rate 2005-08. EU = EU27.