The introduction of new products and processes often requires specific inputs, such as spending on research and development (R&D) – in other words, creative work undertaken on a systematic basis in order to increase a firm’s stock of knowledge. While the concepts of R&D and innovation are sometimes used interchangeably, R&D primarily reflects inputs into the innovation process, while new products and services are innovation outputs. For example, R&D activities do not always lead to successful innovation, as a company may spend money on laboratory research investigating a new chemical compound for its paint, but not have any new paints on offer (at least, not for the time being). And conversely, the introduction of new products or processes may not always require R&D spending.

Low spending on R&D

Firms in the transition region lag behind Israel in terms of the amounts spent on in-house R&D, despite the fact that some individual transition countries have a higher percentage of firms engaged in in-house R&D than Israel (see Chart 1.6). Slovenia comes closest, with an average of 0.7 per cent of annual turnover being spent on R&D, compared with Israel’s 1.3 per cent. While cross-country differences are small in low-tech sectors, where firms in all countries (including Israel) tend not to invest much in R&D, these differences are more pronounced in high-tech and medium-high-tech manufacturing sectors and knowledge-intensive service sectors (see Chart 1.7).

To make or to buy?

Some R&D can be contracted out to other companies and institutions, rather than being conducted in-house. In fact, BEEPS firms outsource more R&D projects than they conduct in-house. At the same time, in-house R&D projects have a higher average cost. The majority of firms conducting R&D employ a combination of in-house and outsourced work.

Government and university spending on R&D

Evidence from BEEPS V is in line with country-level data showing that R&D activity tends to be significantly weaker in transition economies than in innovative advanced economies, whether it is measured in terms of R&D spending or the number of people working on R&D (see Chart 1.11). However, these transition countries are not performing any worse than other emerging markets. For instance, Russia and China spend a similar proportion of their GDP on R&D – around 1 per cent. Interestingly, however, the number of R&D personnel in Russia is several times the figure seen in China as a percentage of total employment, partly reflecting a legacy of the Soviet innovation system (see the discussion of science cities in Box 5.4).

Country-level data also reveal that firms are responsible for the majority of R&D spending in advanced economies, accounting for an average of 61 per cent of such spending in OECD economies (see Chart 1.12). Firms in emerging Asia account for a similar percentage.

In the transition region, however, firms account for a much lower percentage of countries’ overall R&D spending: around 37 per cent on average. In contrast, governments in the transition region account for a larger percentage of R&D spending (more than a third, compared with 12 per cent in advanced economies).10 This reflects a legacy of the central planning system, where innovation was often centralised in specialist research institutes, which remain active to this day in some countries.11

As the development of new technologies relies on both fundamental and applied research, both governments and universities have an important role to play. For innovation to be successful, the efforts of governments, academia and industry must complement each other effectively (as discussed in Chapter 5 of this report).