The European Union published an interesting attempt to analyse R&D spend by 1,500 multinationals worldwide recently. In it, Ireland was positioned as one of the top countries in Europe favoured for R&D investment (10th out of the 27 Member States). However, as I dug into the report, I was disappointed by the quality of the analyses in the case of Ireland, and thus wrote about this in my periodic column in the Irish Times. It was published on 7th January last….
Of all the large multinationals in the world, which of them spends the most on research and development ? Maybe you would think Boeing, or perhaps Apple, or possibly one of the oil exploration companies ? Which industry sector spends the most on R&D globally – maybe the IT and telecommunication sectors ? Which continent is most aggressively accelerating its industrial R&D spend – perhaps Asia ?
A fascinating analysis of the global spend by companies on R&D, with a particular focus on European companies, was recently announced by EU Commissioner Maire Geoghegan-Quinn. Her team annually publish an “Industrial R&D Investment Scoreboard”, and this year surveyed 1,500 companies worldwide.
The comparison of R&D investment by so many companies in so many jurisdictions is a truly daunting undertaking. The work is derived from an analysis of the published annual returns of the companies involved. Of course there are many caveats: companies vary the amount of information they disclose in their annual reports; fiscal year-ends vary from company to company; both mergers and divestments occur; accounting norms still vary tremendously in regulation and interpretation across the planet; exchange rates fluctuate; and so on. But the very largest caveat, and which is amply stressed by the report’s authors, is that the report does NOT identify precisely where R&D is undertaken, and instead merely attributes the entire global spend on R&D by each company solely to its corporate location. As an example, Microsoft has many research centers worldwide (including of course Ireland): but the report simply notes that that Microsoft is headquartered in the USA and spent an estimated 7.6Billion euro (in various locations..) on R&D during its fiscal 2011 year.
So: which company spent the most on R&D ? Answer: Toyota, with approximately 7.75Billion euro during 2011.
Which industry sector spends the most on R&D ? Answer: the automobile sector – while Toyota was number 1 by R&D spend in the world, Volkswagen was 3rd; General Motors 9th; Daimler 12th; Honda 14th; and Nissan 20th. The top IT companies were Microsoft 2nd; Samsung 5th; Intel 8th, and Nokia 15th. Google was 26th; Apple 59th, and Facebook 294th. This neatly illustrates that commercial success (at least in the IT sector) is not driven by the absolute amount of R&D spend, but rather by the focus of R&D investment on judiciously chosen product initiatives: for example, Apple has 47% higher revenues than Microsoft, but spends just 25% of what Microsoft spends on R&D.
Which continent is most aggressive in its growth of R&D spend ? Geoghegan-Quinn’s report notes that both the US and Europe grew their respective spends by about 9% in 2011, ahead of the global average (of about 8%). In absolute terms, the US is ahead of Europe: the former spent 178Billion euro and the latter 145Billion euro, on industrial R&D. However, to repeat the point, these figures are only approximate since the report notes only where companies are headquartered, and not the various locations where their respective R&D spends actually occur.
One of the main conclusions from Geoghegan-Quinn is that corporations – and industry sectors – which invest in significant R&D tend to show above-average employment growth. In noting the strong commitment to R&D spend by many European companies, she calls on EU leaders to show similar commitment to publicly funded R&D by national governments.
What about Ireland ? Well, according to the Geoghegan-Quinn’s report (table 6.1), and which was subsequently picked up by this newspaper and several other Irish media, Ireland is in 10th place of the 27 Member States for industrial investment in R&D. Ireland has 14 companies out of the 1,000 top EU companies for R&D investment.
Hmmm. I wonder. First, as a reminder, the report’s methodology explicitly ignores R&D investment by a multinational in Ireland if its headquarters are elsewhere: for example, Microsoft’s R&D in Ireland is only counted as part of American R&D. Second, different accounting regulations, and even differing interpretation of the same regulation, are widespread on a global basis. But most of all, the 14 Irish companies cited in the report contain several which are registered as headquartered in Ireland but which appear to have most – if not all – of their executive team located elsewhere.
What is an Irish company ? Is Seagate (33rd in the report), a provider of computer disk drive technology, with its executive team in Cupertino in California but registered as headquartered in Ireland, an Irish company ? How about Covidien (Health Care systems, and 63rd); or Accenture (management services, and 66th); or Ingersoll-Rand (industrial systems, and 105th); or Cooper Industries (electrical machinery, and 167th); or Warner Chilcott (pharmaceuticals, and 237th); or James Hardie Industries (Building materials, and 497th); or Jazz Pharmaceuticals (736th) ? How much of these various professedly Irish companies investment in R&D is actually spent in Ireland ? If the true location of R&D spend by these companies, and the R&D spend undertaken locally by companies headquartered overseas were to be all computed, would Ireland still be 10th out of the 27 Member States ?
Intriguingly, the report also lists Bank of Ireland (404th) as a UK company, and thus attributes its reported 35M euro investment on R&D during 2011 as British rather than Irish.
Is a company whose global headquarters are legally registered in Ireland, but whose CEO and majority of its executive team are elsewhere, whose major operations including R&D are elsewhere, and the vast majority of whose revenues are generated elsewhere, nevertheless an Irish company ? These are international legal and governance questions, but the corporate tax arrangements of several multinationals are now under active scrutiny in the UK (leading to Parliamentary Committee questions), the US (Senate Committee questions) and elsewhere. I believe it is also significant that the Irish Revenue Commissioners have just very recently announced a new initiative for self-audit of Transfer Tax Compliance by companies registered in Ireland.
Perhaps I digress. It is clear that Geoghegan-Quinn and her team have done difficult work in trying to harmonize an analysis of global spend on R&D across 1,500 different companies. I suspect that many of her general observations are probably accurate, even if the data collected has many important caveats and arguably is quite imprecise.