Emerald Group Publishing Limited
Copyright © 2008, Emerald Group Publishing Limited
Article Type: Editorial From: Journal of Manufacturing Technology Management, Volume 19, Issue 5
In previous editorials for JMTM, I have discussed the subject of international competitiveness in manufacturing, and in particular the question of how newly industrialising countries, and especially China, can become globally competitive by improving their innovation and R&D capability. In Volume 18, Number 3, I explored this question further by speculating about whether foreign companies should be rushing to entrust the research for their most commercially sensitive products to Chinese subsidiaries, given the weak and confusing laws on intellectual property rights in China.
For companies in industrialised countries withholding knowledge from partners and subsidiaries in less-developed countries is only one way of protecting their technological advantage and to avoid creating their own competitors. In fact, if companies used this as their only means of defence against losing competitive advantage, they would probably still lose out in the long term because these prospective competitors can usually acquire knowledge in other ways and from other sources.
For this reason, the only really effective measure for companies in industrialised countries to defend their competitive advantage is by investing further in their own innovation and R&D projects so they can remain one step ahead of the existing and potential competition. However, for smaller manufacturing companies, this can be difficult because of the heavy financial investment involved. This is why many smaller companies often try to extend the life cycle of their current products and processes without consideration of the consequences of delaying their future replacement.
Recognising this problem for smaller companies, most governments in industrialised countries try to find ways by which the investment burden for innovation and R&D can be lightened. Incentives through the taxation system are often used to encourage innovation. For example, since 1981, the USA has had a system of tax credits for research and experimental expenditure (R&E), which, together with low-tax rate on capital gains, partly compensates entrepreneurs for their risk. Other developed countries using tax credits to encourage innovation include New Zealand, which is trying to increase its spend on R&D from the relatively low level of 1.17 per cent of GDP compared with the OECD average of 2.26 per cent.
In Europe, the Directorate-General (DG) for Enterprise and Industry of the European Union has an innovation policy with two strands. The first is to raise awareness among companies of the need for innovation and the benefits it brings. The second is to encourage member governments and public authorities to create the conditions for promoting innovation. In particular, these conditions should enable small firms to act quickly, to share ideas, and to ease the administrative and financial burden on small firms. In the UK, this EU policy is reflected in the enterprise strategy, launched in March 2008 by the Department of Business Enterprise and Regulatory Reform, which sets out several key enablers for promoting an enterprising economy. The enablers that are specifically related to the promotion of innovation and R&D within the manufacturing sector include assistance to develop and commercialise innovative products and process, and providing access to finance. Once again, R&D tax credits are an essential means of fostering innovation and, since their earlier introduction in 2000, have successfully delivered more than £2.3 billion of support to companies through almost 30,000 claims. They can allow companies to deduct up to 150 per cent of qualifying expenditure on R&D activities when calculating their profit for tax purposes. R&D tax credits are available to firms that extend overall knowledge and capability in science or technology, or to firms that create or improve a process, material, device, product or service.
Of course, fiscal measures such as tax credits are not guaranteed to improve the rate of innovation among companies, although their effectiveness is likely to be greater than direct financial incentives. Therefore, is it important for the authorities to carefully monitor their long-term benefits for the economy and competitiveness in relation to their cost to the revenue system.