Analysis by HSBC has confirmed what many economists suspect − that investment in innovation tends to have an impact on trade performance. A boost in business expenditure on research and development in one year tends to be followed by higher export performance in the next, according to our study.
The close association is evident at both the national level, and for leading technology sectors. Globally, a 1 per cent increase in R&D spending by business in a given year was associated with a 0.17 per cent increase in exports the following year, after accounting for other factors.
But for information-technology services, the comparable rise in exports was even greater at 0.39 per cent. And the export response ranged from 0.58 per cent to 0.71 per cent for goods exports in sectors such as chemicals and pharmaceuticals, computers, electronics, optical products, machinery, and motor vehicles.
Our analysis of 42 middle- and upper- income countries in the period since the 2008-09 recession also reveals the importance of location for exporters. Mainland China showed a strong link: its business R&D increased by 3.3 times over the decade as its exports grew by 1.6 times.
Policies and regulations can influence firms’ ability to trade and invest and this can affect exporters’ competitiveness. Protection for intellectual property can affect the ability to acquire technologies and incentivise firms to develop their own proprietary innovation.
Besides business expenditure on R&D, our regression analysis considered factors such as net inflows of foreign direct investment, policies on the freedom to trade or intellectual-property rights, GDP per head, and country-specific influences.
The analysis showed that R&D spending is not driving export performance in isolation. In most cases, it reveals significant positive relationships for at least one of these other factors.
For instance, freedom to trade matters significantly for chemical and pharmaceutical products, computers, electronic and optical products, plus electrical equipment. Openness can enable businesses to source needed inputs − including technologies − from the most competitive suppliers globally. Most countries’ cutting-edge technology is imported.
For both service and manufacturing firms, trade-related regulatory impediments can facilitate or impede market access for imports and exports. Red tape can be a more costly barrier to trade than tariffs; reducing it can ease trade in both directions. Protecting intellectual property rights can incentivise innovation by providing market exclusivity for firms making technological advances.
In some cases, including chemical and pharmaceutical products, R&D spending is complemented by inflows of foreign direct investment that in turn help to boost export performance. And, going forward, such investment can indirectly raise exports more broadly in an economy as others apply lessons learned from the experience.
Among our 42 countries, R&D intensity is greatest in South Korea and Japan plus smaller economies such as Israel, Sweden and Switzerland that have developed advantages in niche areas of innovation, despite lacking scale.
Singapore, Netherlands, New Zealand, Ireland and Denmark were the top performers in our sample with respect to freedom to trade advantages. Finland, the US, Switzerland, Australia and the Netherlands delivered top ranked intellectual-property protection. The US, China, Germany, Singapore and Ireland, in particular, benefit from foreign direct investment.
Again, some small economies are utilising these factors – sometimes more than one – in conjunction with R&D expenditure.
The analysis indicates that firms that differentiate their products through innovation and that produce in economies friendly to trade and intellectual property can reap competitive advantages in selling abroad.Would you like to find out more? Click here to read the full report (you must be a subscriber to HSBC Global Research).
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