Business R&D spending in South Africa shows signs of recovery

Minister of Science and Technology Naledi Pandor at the launch of two national surveys on R&D and IP last week. (Photo courtesy DST)

Minister of Science and Technology Naledi Pandor at the launch of two national surveys on R&D and IP last week. (Photo courtesy DST)

Our aim in government is to double the investment in R&D (research and development) from the 2014/15 figure of 0.77% to 1.5% of GDP. That means doubling the 2014/2015 investment of R29-billion to roughly R60-billion a year by 2020.

The latest R&D Survey (2014/2015) shows an improving outlook for R&D investment. It was R29.3-billion, an 8.1% increase over the previous year in constant 2010 rands.

This improvement took place against a slowing rate of GDP growth that was 2.2% in 2013 and 1.5% in 2014.

There are a number of trends to observe. First, BERD (business enterprise expenditure on R&D) contributed most to the increase — and the bulk of the increase came from the manufacturing industry.

The financial and business services industry, which includes software development, continues to be the largest contributor to BERD, having surpassed the manufacturing industry in 2011/12.

Furthermore, the electricity, gas and water supply industries and the transport, storage and communication industries that have reported declines over the past three surveys have increased their R&D expenditure.

R&D spending in mining and quarrying has declined by 20% and this is an area of concern, given the current interventions under the Operation Phakisa initiative to help revitalise the economy.

Second, the government was the largest funder of R&D, funding 43.9% of GERD (gross domestic expenditure on R&D). The second-largest funding source was the business sector with 40.8%, foreign sources with 12.2% and other local sources with 3.1%.

The continued year-on-year increases in government funding for R&D is particularly important in sustaining the R&D spending and performance of science councils and higher education institutions. These two sectors are dependent on government R&D funding and have consistently increased their R&D spending since the start of the global economic crisis in 2008. However, aside from the number of publications, we have been unable to track the outputs, outcomes and socioeconomic impacts of this investment in public research institutions.

It’s in this context that we welcome the publication of the first South African National Survey of Intellectual Property and Technology Transfer at Publicly Funded Research Institutions. The survey reveals many trends that we did not know before, but we want to highlight four in particular.

First, the management of technologies, patent families, trademark families, registered design families and new patent applications filed increased more rapidly than the increase in research expenditure. This is clearly good news. Between 2011 and 2014, on average 100 new technologies were added annually to the portfolio managed by universities and science councils.

Second, there has been a quadrupling in the actual number of licences executed per year in the period. More than 88% of this revenue accrued consistently each year to the same four institutions that have well-established TTFs (technology transfer funds). The majority of IP (intellectual property) transactions yielded less than R100 000 per year.

Third, 45 start-up companies were formed to commercialise the institutions’ technology, 73% of which were based on publicly funded IP.

Fourth, the majority (53.5%) of all staff in technology transfer offices had four years or less experience in technology transfer; females comprised 56.4% of technology transfer staff in higher educational institutions, and 65.2% in science councils. Viewed in the context of overall trends in the racial and skills composition of the labour force in the country, these statistics show that there is clear room for improvement.

Overall we are beginning to see enhanced socioeconomic impact from public investment in R&D.

What the current report does not reveal is detailed information on the IP portfolio and outputs of commercialisation activities. Nonetheless, this survey constitutes a critical baseline study. I hope that future editions will be able to track other indicators that are not reported on here as well as make a number of international comparisons.

Returning to the R&D survey, the third trend to note is the increase in the number of R&D personnel — this includes researchers and other personnel directly supporting R&D. The number of researchers increased to 48 479 in 2014/15. About 84% of the increase in R&D personnel comprised postgraduate students. The DST attributes this to the Research Chairs Initiative and postgraduate bursaries, which are helping to expand the pipeline of the researcher workforce. The ratio of researchers per 1 000 employed was 1.5 in 2014/15, and has remained around this level for the previous decade. This is mainly because the researcher workforce has only been expanding at an equivalent rate to that of total employment.

All in all, the most important trend to observe from the R&D Survey 2014/2015 is that the business sector has replaced the higher education sector as the lead contributor to the increase in R&D spending.

The growth of BERD has a direct and immediate impact on economic growth because the private sector is more likely to embrace related commercial opportunities by creating new and improving existing products, services and production technologies. These activities can impact directly on the creation of new enterprises, new industries, and new jobs.

To encourage the private sector to invest in R&D, government introduced the R&D tax incentives in 2006. The initial uptake was less than government had hoped, so the incentive was modified by the Taxation Laws Amendment Act in October 2012. The subsequent increase in applications caught government by surprise, and additional resources have had to be secured to deal with the increase and the backlog that has resulted.

Private sector innovation activities are dominated by activities that are not necessarily new. The bulk of the private sector innovation-related expenditure is spent on the acquisition of new machinery, equipment and software, as opposed to introduction of new products and processes. A limited portion of turnover of innovative companies is generated from products that are new to the firm or new to the market.

BERD is concentrated within larger enterprises, with about 80% performed by 20% of enterprises. State-owned enterprises (SOEs) are counted in the business category for R&D purposes and they are a key driver of major public-procurement programmes. They form the core of the network industries, which play a central role in addressing developmental objectives (economic infrastructure for energy, ICT, transport, water, mining, and defence technology).

SOEs have the necessary bargaining position to mobilise international R&D. Major international procurement supply contracts that are provided by these entities hold good opportunities for technology transfer, strengthening the local research and technology infrastructure and developing local expertise.

Government is working to attract international R&D and to take better advantage of our integration into global R&D value chains. One mechanism that is popular is an “equity-equivalent arrangement” whereby multinational companies that do business with government are required to earn BEE points through a once-off equity equivalent funding contribution. A company can earn points for making investments towards skills and training support, enterprise development, and R&D. Here we are reminded of the recent substantial 10-year investments made by General Electric and IBM.

There are many more small than large enterprises. Innovation activity occurs in a much wider community than just R&D intensive, larger enterprises. We are encouraging the level of activity of SMMEs in R&D. In fact our Technology Innovation Agency has now been repositioned as an agency whose funding instruments will better enable innovators, entrepreneurs and small, medium and micro enterprises to commercialise their technology innovations.

However, there is a need for a venture capital fund for high-technology SMMEs as well as startups.

The government encourages South African venture capitalists to facilitate joint investments in commercial science, technology and public-benefit projects as well as to assist with developing a new generation of venture capital companies through mechanisms such as treasury’s Venture Capital Company Tax Incentive scheme.

Treasury announced last year that a Small and Medium Enterprise Fund is being established, with over R1-billion already committed and complemented by mentoring by seasoned business leaders for start-ups.