Insightegy Consultants

Finland and Sweden are number one and two in R&D expenditure proportionate to GDP. Are there areas in which they could be spending the money more wisely in Russia?

‘All that matters can be measured’ goes the saying. The benefits of Innovation – and in particular R&D – are a grey area in which this might not be true. We know it’s important but how much do firms really benefit from their outlay on R&D? More than one study has shown that there is no relationship between a firm’s R&D expenditure and its profit. This is particularly relevant when considering the Swedish and Finnish economies, number one and two respectively in R&D expenditure as a proportion of GDP.

Statistics show that the cost of Swedish R&D came in at 3.98% of GDP in 2005 with Finnish expenditure slightly lower at 3.48%.  Most of this expenditure is coming from the private sector backed by favorable government tax incentives. However, despite the exemplary historical pedigree of both countries in innovation, neither can claim to be world leaders over the past decade.  The reasons for this are manifold but it does suggest R&D funds could be better directed.

The relative cultural and geographical proximity of Russia to the Nordic countries suggests that redirecting at least some of firms’ R&D expenditure to Russia would be an effective measure for firms to take. The Russian government has recognized the important role that innovation plays in a country’s economic development. In a country which has neglected its vast R&D potential for decades (R&D comprised less than a percent of GDP until last year), change is afoot.

When outsourcing R&D, Russia is often overlooked in favor of India. The fact that 30% of Russia’s R&D expenditure comes from the private sector, compared to 65% and 69% in Sweden and Finland is testament to this tendency. India doesn’t have a traditionally innovative culture to the extent that Russia seems to be less relevant to firms than abundant cheap labor. The climate for investment in R&D currently in Russia might demand firms rethink their R&D expenditure.

The Russian government has promised to invest $1trillion in R&D by 2012. A desire to implement public-private partnerships means that this money will find its way to corporations who are willing to make the R&D investments in Russia. As ever, the winners will be those that take an early initiative: as more and more companies seek to put an innovation strategy in place, the less resources (top caliber researchers, government funds, sites etc.) are available.

Finnish companies in particular could benefit from taking the initiative. 2.2% of Finns are employed in R&D activities. Compare this to 0.6% of the Russian working population; the void in these figures should spell potential for R&D. The resources are there and the climate is favorable.  Innovation is achievable in Russia.