Europe’s R&D Investment Problem

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Europe’s R&D Investment Problem

Today we continue our data-centric look at the European economy with an analysis of R&D expenditures by country and some comparisons to other major economies. As with our work yesterday on educational attainment, there are dramatic differences at play here. Data source citations appear at the end of this section.

The key points:

#1. Despite the US and EU having roughly the same total GDP, European governments and businesses spend far less on research & development. (2016 data, latest available, presented here):

  • EU (28 countries): 1.94% of GDP spent on R&D
  • US: 2.74%
  • The difference in dollars: $144 billion annually (using $18 trillion as a rough approximation of US/European GDP)

#2. China has overtaken the EU in terms of R&D/GDP, South Korea is the leader in emerging economies, and Japan continues to lead the developed world.

  • China spent 2.12% of its GDP on R&D in 2016, more than double its outlays in 2000 (0.89%).
  • South Korea spent 4.24% R&D/GDP in 2016, also essentially double its run rate from 2000 (2.14%).
  • Japan spent 3.14% of GDP on R&D in 2016, although its investments have been dropping for several years (peak of 3.4% in 2014).

#3. Within the Eurozone’s major economies there is a wide disparity in both R&D spending and the growth of such expenditures.

  • Germany: 2.94% in 2016, and growing modestly (3 basis points a year since 2011)
  • France: 2.25%, but flat over the past 5 years
  • United Kingdom: 1.69%, flat over the past 5 years
  • Italy: 1.29%, declining modestly in the last 2-3 years
  • Spain: 1.19%, declining significantly over the last 5 years.

Our investment takeaways from this data:

  • Ever since we started DataTrek last year, we have been recommending an underweight in European equities, and nothing here makes us reconsider that stance.
  • In an ever-more technologically dependent and integrated global economy, R&D outlays are table stakes for companies and countries alike. High levels of research and development don’t guaranty success, but low levels certainly limit long-term growth.
  • Europe’s structural underinvestment in R&D is visible in its equity markets: the MSCI Europe Index is just 5.4% weighted to Technology versus 26% for the S&P 500 and 29% for the MSCI Emerging Economies Index. That’s what happens when you eat/spend your seed corn instead of replanting it with R&D.
  • Europe’s chronic underinvestment in R&D also explains their eagerness to regulate Technology – they need time to catch up given their low rate of investment.
  • The only reason to be even/overweight European equities is if you see an imminent crash in global Tech sector valuations, given the region’s limited exposure. Still, that’s a trade rather than an investment. Over the long run, how can you own any company/industry/region that doesn’t invest for the future?

Data source (OECD website): https://data.oecd.org/rd/gross-domestic-spending-on-r-d.htm