R&D Spending Climbs Higher In The US and Globally

Last week, in a Bloomberg “Deep Dive”, they used a chart (below) that shows that while earnings have fallen and capex investment has been basically flat since 2014, companies in the S&P 500 continue to invest more and more money into research and development (R&D). This, of course, is a positive sign as investment in R&D lays the seeds for future growth. In addition, the fact that companies continue to plow money into their R&D labs refutes the argument that companies are not investing in the future simply because they have restrained capex spending.

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And while Bloomberg just focused on US companies, our own internal data on R&D spending illustrates that most developed world countries are investing in R&D at a much higher rate than the what nominal GDP is growing at. This is a positive sign for the future health of these economies.

Since the US is by far the largest investor in R&D, we will still begin there. Aggregate R&D spending in the GKCI United States Index (very similar to the MSCI USA Index) totaled nearly $270 billion over the past twelve months. Since 3/31/2000, R&D spending has increased at a nearly a 6% annual rate.

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The second largest investor in R&D from a country perspective is Japan. Aggregate R&D spending in Japan has actually fallen since making a high of $140 billion in 2012. However, Japanese companies still invested over $100 billion over the past twelve months. And from a growth rate perspective, Japanese companies have actually increased their R&D spending at a faster pace than US companies have since 3/31/2000.

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Israel and Switzerland both stand out in the developed world as big-time investors in R&D. Switzerland, which is the fourth largest R&D investor in terms of overall aggregate dollars, has increased R&D spending at nearly 9% a year since 3/31/2000. Israel has increased spending by about 11% per year.

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Switzerland is unique in that their intangible to tangible investment ratio is over 2x. Put another way, Swiss companies in aggregate spend 2.3 dollars on R&D and other intangible investments for every dollar they spend on traditional capex. Five other countries have an intangible/tangible investment ratio over 1. When we write about the shifting composition in investment, this is what we are talking about Norway, Spain and Portugale, with an intangible/tangbile investment ratio below 0.2x are represented of how all countries and companies were investing 20-50 years ago. Now, more and more companies are shifting to a much more intangible-dominant investment profile. The US is just below parity at 0.97x.

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There is a chorus in the financial community that companies are sacrificing future growth by foregoing current investment. This argument almost never takes into account intangible investment and for several countries around the world, intangible investment is a larger share of overall investment than traditional capex. When overall investment is analyzed to include intangible investments, we can see that developed world companies in aggregate have invested nearly $3.5 trillion dollars in total capital investment over just the past twelve months.

© GaveKal Capital

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