Investing in R&D in 2023 Makes More Sense, in a Different Way. 2022 R&D Outlook

Mentioning R&D, or research and development, we as RVmagnetics refer to the activities that businesses, governments, and other organizations engage in to develop new products, processes, or services. Fundamentally, being an R&D organization ourselves, we are vastly affected by the factors influencing investments in R&D.

Surely the last few years have not been the calmest for this line of work, so we found the importance in not only evaluating 2022 global economic effects on the R&D industries and 2023 R&D outlook but also making our observations public through this blog, so as to make it helpful for the relevant reader.

The main effects we are going to address are inflation, war, and pandemics. These effects themselves depend on a variety of factors, including:

• governments and international economic unions take and reactions,
• the specific industries and sectors that are touched on,
• the strategies that organizations can adopt to respond to them.

2022 in an R&D Nutshell

Inflation

Inflation is the sustained increase in the general price level of goods and services in an economy. It can naturally have a number of effects on R&D. Inflation can reduce the purchasing power of organizations, making it more difficult for them to invest in R&D activities. It can also make it more expensive for organizations to purchase the equipment, materials, and other resources needed for R&D. Additionally, inflation can reduce the value of any returns that organizations receive from their R&D investments, which can make it less attractive for them to engage in R&D. 2022, with the legacy from 2020–2021 – showed the aforementioned in unfortunate, practical ways, and different economies around the world had different reactions to it. As the US dollar is the main global reserve currency – let’s see their reaction to the R&D investments in this regard first:

THE US

As addressed through the US Department of Energy (DOE) the Biden-Harris Administration announced $1.5 billion (Biden’s Inflation Reduction Act). The funding is furnished to improve scientific facilities, update infrastructure, and address neglected maintenance projects at national laboratories managed by the DOE's Office of Science. These laboratories are centers of innovation in the region, including clean energy technology that creates well-paying jobs and lowers energy costs for households. This substantial support will assist in realizing the Biden-Harris Administration's go­al to drive research and innovation that addresses the country's biggest challenges, as well as help achieve the President's am­bitious climate objectives.

The US “Inflation Reduction Act” will allocate resources for:

• The development of advanced research facilities for scientific computing.
• Initiatives in the field of basic energy sciences.
• The construction and procurement of key equipment for high energy physics research.
• The construction and procurement of key equipment for nuclear physics research.
• The construction of facilities for isotope research and development.
• The improvement of infrastructure for science laboratories.
• The construction and procurement of key equipment for fusion energy science research.

THE EU Response

The European Union plays a significant role in global research and innovation (R&I) activities, representing about one/fifth of worldwide R&I efforts, despite having a population that represents less than 7 % of the world's total.

Current Geopolitical and Economical order of the world has had its effects on the European Union too – Inflation in Europe may have an average rate of 10 %, however, its impact varies across different industries and sectors. Therefore, it's crucial for policies aimed at mitigating its effects to take these distinctions into account. This is especially important for firms that heavily invest in innovation, such as small and medium-sized enterprises (SMEs) operating in cutting-edge technologies and in high-risk and competitive fields.

The main program for funding R&D in the EU is Horizon Europe, which is the current program that runs from 2021 to 2027. The program has a budget of €95.5 billion and is intended to support R&D in a wide range of areas, such as health, energy, digital, industry, and transport, with the goal of driving innovation and economic growth within the EU.

Another funding program for R&D in 2021, for reference, was the European Research Council (ERC). This program funds individual researchers and their teams to pursue frontier research across all scientific disciplines.

The EU Commission also supported R&D in the field of innovation, through the Innovative Medicine Initiative (IMI) which is a public-private partnership between the EU and the European pharmaceutical industry. The program co-funds collaborative research projects in the field of medicines.

In addition to these programs, the EU also had various initiatives and actions that focused on specific areas such as encouraging sustainable development and combating climate change, supporting SMEs, and strengthening the digital single market.

The EU Commission has traditionally been dedicated to investing in research and development to drive economic growth and innovation. The funding programs such as Horizon Europe and the ERC, along with other initiatives and actions will continue to support the R&D and innovation within the EU.

The purpose of the current framework program (Horizon Europe) is to re-establish the EU's technological superiority (also to support a central industrial policy of course). However, inflation poses a significant threat here, as well as funding for projects, is distributed through competitive processes based on merit. In other words, a grant is provided to the winning projects to cover a percentage of the total cost, which means the project costs must be determined well before the execution.

Sudden increases in the cost of materials or other inputs, as seen currently, can severely impact the feasibility or progress of the project, something many researchers and SMEs are now confronting.

This is an issue yet to be addressed by the EU commission. As Lina Gálvez Muñoz showcased in her recent Viewpoint – the Commission's im­plication to the aforementioned cost-adjustment in further Horizon projects is similar to the approach for the projects applied for in 2017 and awarded in 2018. This implies that later applicants should have predicted the COVID-19 pandemic, shifts in global supply chains, concentration of business processes leading to price rises, and war in Ukraine affecting raw material prices.

However, neither the Commission nor the European Central Bank forecasted an inflation rate of 10 % for 2022. Why should small and medium-sized enterprises and innovative entities be expected to predict major macroeconomic changes?

The War

War can have a significant and direct impact on research and development activities. It can disrupt the supply chains, damage the infrastructure, and eliminate R&D facilities and equipment. Divert attention and resources away from R&D and make it challenging to plan and invest in long-term projects due to the uncertainty and instability created by war.

The ongoing geopolitical situation has created this exact uncertainty surrounding global security. The European Commission's recent Communication Towards a green, digital and resilient economy: our European Growth Model reaffirms the commitment to advancing the EU's sustainable growth agenda through international partnerships. The deteriorating relationship between Ukraine and Russia, culminating in the invasion of Ukraine, has exposed significant vulnerabilities and highlights the need for accelerating the EU's economic transformation. The unexpected factor of the Russian invasion of Ukraine is set to have a far-reaching impact on global geopolitical relations, requiring a reduction of industrial dependencies in strategic sectors through economic restructuring, which will likely affect innovation. At the same time, the war will have a negative effect on Ukraine's thriving tech ecosystem, exacerbate reshoring trends, and exacerbate the global chip shortage.

The International Monetary Fund (IMF) attributes the economic downturn primarily to the Russia-Ukraine war, with its costs spreading through higher food and energy prices and disruptions in global trade. The IMF predicts that Ukraine's economy will contract by 35 % in 2022, and even if the war were to end soon, it will severely impede Ukraine's economic activity for many years to come. Similarly, the IMF report forecasts Russia's economy to shrink by 8.5 % in 2022 and 2.3 % in 2023, due primarily to reductions in energy exports to Western Europe and trade and financial sanctions by Western countries, along with the withdrawal of foreign businesses from various Russian industries. Other European economies are also shrinking due to the war's effects.

With reduced economic growth, R&D investments are also expected to shrink, although not as severely (except in the aerospace and defense industries. It had also been stated that companies such as Maryland and Lockheed-Martin had discussions about increasing the production of weapons for Ukraine (the discussions had allegedly been held with executives of the US military).

Threats to public health…

…such as the global pandemic, have also had a significant impact on R&D. The economic downturn and disruptions caused by the pandemic have made it difficult for organizations to invest in R&D. Many organizations have had to reduce their R&D budgets or delay R&D projects in order to respond to the immediate challenges posed by the pandemic. At the same time, the pandemic has also led to increased demand for certain types of R&D, such as the development of vaccines and treatments for COVID-19. In fact, the US National Bureau of Economic Research published a paper on December 21 called Stem Employment Resiliency During Recessions: Evidence From The Covid-19 Pandemic stating the increased demand of Science,Technology, Engineering and Mathematics (STEM) workers over the non-STEM workers during the pandemic.

According to the National centre of Science and Engineering Statistics of the US the estimated budget authority for R&D and R&D plant for FY 2021 was $43.47 billion, and the proposal for FY 2022 was $51.14 billion (a 17.6 % increase).

It's great to see that R&D funding saw a rebound in 2022, with a 7.3 % increase in federal funding and more companies reporting an increase in spending compared to the previous year. This indicates that the impact of the COVID-19 pandemic on R&D investment was less severe in 2022. In addition, data from the National Institutes of Health shows that the number of R&D grants awarded increased by 8 % compared to the previous year, which suggests a renewed focus on supporting scientific research and development. Overall, the data shows that 2022 was a stronger year for R&D compared to 2021.

The COVID-19 pandemic has highlighted the importance of strengthening European leadership in key technological areas and the appropriately furnished investment strategies in Research, Development, and Innovation.

The acceleration of digitalization and supply chain disruptions have brought attention to the need for EU technological and data sovereignty. To maintain and strengthen the EU's technological leadership, it is essential to increase R&D expenditure for innovative solutions, improve access to materials along strategic value chains, and create a more efficient regulatory framework for advanced technologies. Analyzing global technological specialization patterns is another, not any less crucial cornerstone to identify critical emerging areas, assess the EU's global competitiveness, and guide EU policy actions accordingly.

To end the section on a positive note, however, it is worth mentioning that green transition seems to be happening, and technology is playing a key role here, which would be impossible without the improved R&D initiatives by companies, governments and institutions over the úast years – who kept on their R&D and R&I investments even when times are tight. The notable positives:

• two-thirds of new cars sold in Norway in 2021 were electric,
• according to the International Energy Agency (IEA), over half of the global increase in electricity supply in 2021 came from renewables.
• the IEA predicts that 95 % of new power capacity in the next five years will be from renewable sources.
• breakthroughs in storage and innovations in solar and green hydrogen technologies are enabling more sustainable production and consumption.(India is a strong example, reaching its 2030 target for non-fossil fuel electricity generation nine years ahead of schedule and with new goals to quintuple renewables capacity by 2030).

Stepping into 2023: What Prospects Does R&D Have so far?

Even though the above-mentioned 3 main global issues are interconnected and affect the R&D within different countries, industries and sectors altogether, there are other global challenges that tilt the attention from relevant R&D investments in 2022, and already raise concern looking through 2023. One of these concerns is the rising cost of energy which has its effects for universities and research labs throughout the EU, as energy-intensive facilities, such as particle accelerators and supercomputing centers, feel the pinch. Many research organizations are struggling to find ways to cover these increasing and unpredictable energy expenses without sacrificing funding for research and education.

The European Commission is actively assessing the impact that these rising energy prices and supply chain disruptions are having on the research sector, as stated by Joanna Drake, Deputy Director-General at the Commission’s re­search directorate.

Additional risks are posed to the Initiatives against Global Warming: especially the unfortunate event of the Russian invasion of Ukraine poses a significant risk to the progress towards global emission reduction goals. Despite the International Energy Agency's assessment that achieving net zero emissions by 2050 is not possible with any new fossil fuel developments, this political situation is expected to have an adverse effect on the industry.

Expectations are modest from 2023, so how should the R&D stakeholders act? Simply – investments need to be careful, but fast.

The ongoing war in Ukraine and resulting inflationary pressures posed a significant risk to the R&D industry going into 2023. The conflict has disrupted supply chains and disrupted the flow of goods and services, which could impact the ability of businesses and research institutions to continue their R&D efforts.

In terms of the outlook for R&D in 2023, it is difficult to predict with certainty how inflation, war, and COVID-19 will affect R&D this year. We only have very limited information, and a rather unprecedented global modern state of the world, full of events that will continue to evolve and unfold, and their impact on R&D will depend on a number of factors, including the actions that organizations take to respond to them. One thing is clear R&D will continue to be affected by these events in 2023.

And what could we mean by fast R&D? It is no secret that R&D is not cheap, and it is also not a secret that when large companies pay especially large sums of money – there are ways to minimize the financial impact. In this regard, we as RVmagnetics can provide a relevant Good Case Practice (GCP) – of dividing the payment into multiple iterations and negotiating the outsourced R&D payments once the service is finally delivered.

This helped us to generate deals with relevant conditions even through the recession, while it also helped our partners with lighter payment conditions – to be able to keep their R&D efforts afloat.

To have a remote expectation we can go through potential outlooks or precedents set forth by different relevant organizations, sources, analytical bodies, Government and Unions funding and investment plans.

Some of the main economical forecasts towards 2023 according to GPM are:

• Global economy projected to grow only at 1.6 % in 2023, hindered by financial conditions, COVID in China, and Europe's gas problems.
• Global Economy not at immediate risk of recession, however US recession is by end of 2023.
• S&P 500 expected to evaluate the lows in 2023 again, but potential asset recovery by year-end may be possible.

In the US, similar to the 2022, the Biden-Harris Administration has included significant investment in R&D as a priority in the President's 2023 Bud­get. The budget allots $204.9 billion for Federal R&D, a 28 % increase from the 2021 enacted level. This reflects the Administration's fo­cus on long-term investments to tackle societal challenges through a science-first approach. The budget also includes a five-year, $81.7 billion allocation at the Department of Health and Human Services for pandemic preparedness, including significant investments in R&D, as well as $16.9 billion in discretionary funding for climate innovation. Additionally, the Administration is committed to expanding STEM education and increasing participation and capacity at underserved institutions, with $343 million allocated at the National Science Foundation and $260 million at the Department of Energy. R&D investments will also prioritize programs that advance equity for all, with $400 million allocated at the National Institutes of Health for health disparities research.

EU. According to projections in the World Economic Outlook, Europe's advanced economies will grow by just 0.6 % in 2023, while emerging economies (excluding Turkey and conflict countries Belarus, Russia, and Ukraine) will expand by 1.7 %. This is a decrease of 0.7 % and 1.1 %, respectively, compared to the July projections of 2022. More than half of the countries in the euro area are forecasted to experience technical recessions, with a 1.5 % average output decline from the peak. Croatia, Poland, and Romania will also experience technical recessions, with an average peak output decline of over 3 %.

The IMF estimates that Europe's output and income will be nearly half a trillion euros lower than pre-war forecasts due to the continent's severe economic losses from the war. Inflation is also projected to decline next year but remain significantly above central bank objectives, at around 6 % and 12 % respectively in advanced and emerging European economies.

According to scenarios, a complete shutoff of remaining Russian gas flows to Europe, along with a cold winter, could lead to shortages, rationing, and a loss of up to 3 % in GDP for some central and eastern european economies. Additionally, it could cause a further increase in inflation across the continent. Even without new energy supply disruptions, inflation is expected to remain high for longer, driven primarily by high energy and food commodity prices, particularly in the Western Balkan countries. While these prices are expected to remain elevated for some time, there is hope that they will stop increasing and lead to a decline in inflation throughout 2023.

To address the aforementioned predictions and concerns, the EU has approved the major Horizon Europe work program for 2023–2024, allocating around €13.5 billion to support European researchers and innovators in tackling environmental, energy, digital, and geopolitical challenges in the first week of December 2022. This funding, which forms part of the larger €95.5 billion EU research and innovation program, Horizon Europe, aims to aid the EU in achieving its climate goals, enhancing energy security, and fostering the development of core digital technologies. Additionally, it will target actions to aid Ukraine, boost economic resilience, and aid in a sustainable recovery from the COVID-19 pandemic, all while striving for a stronger European research and innovation ecosystem through wider participation, greater mobility, and funding for top-notch research infrastructures.

On another note, the IMF has recently adjusted their forecast for China's economic growth, reducing it from 5.6 % in October to 4.4 % due to a resurgence of coronavirus infections.

Top R&D Priorities for Leaders, Investors, and other Active Players in the Market:

As the recent Credit Suisse publication showcased based on their extensive research – the 2023 Investment Roadmap can be diluted down to the following notions:

• Multi-asset diversification may make a comeback.
• The inflation peaks will start to decline.
• Global growth will be in the laws.
• Tax increases due to potential budget deficits.
• USD expected to stay strong against other emerging currencies.

However, what are the important factors to consider, for a potential investor in R&D? What is a firm R&D lead supposed to account with when diversifying investments in such challenging times?

A good rule of thumb here is to start one step at a time, keeping the steps short & simple:

Manage Resources and Spend Strategically

• Identify the resource trade-offs that must be made in cost management and budgeting and create a prioritized list.
• Accelerate digitalization with steps such as migration to a cloud to support critical business needs and reduce the impact of rising energy costs.
• Radically re-evaluate collaboration approaches, workflows, and processes to make them faster, simpler, and more agile – this includes collaboration frameworks both with clients, suppliers, and talent.

Accelerate Key Digital and Technology Initiatives

• Invest in predictive and autonomous digital projects that will make your organization faster and leaner, including in its decision-making processes.
• your focus to a select few metrics that will help measure the progress and success of your digital initiatives.

Business leaders face specific pressures today that vary by sector, and industry, so it is important to take action now to prepare for these challenges, rather than waiting to see the full impact.

The largely important baby steps to start taking now include

• Benchmarking current spending to prepare for strategic resource decisions: cutting on R&D investments can seem easy in the short term, but may cause a bigger issue in the long-run.
• Surfacing cost inefficiencies and identifying cost optimization opportunities using digital tools.
• Collaborative CFOs and CIOs are aligned on the financial impact of technology and understand financial management needs, specifically the RoI on R&D activities. 62 % of CFOs from Gartner’s research agreed that CIOs understand how technology impacts corporate finances.

A Gartner research also showcases the Planned Increase in Technology Investment in 2023, where the following % of R&D leaders planned to increase their investments in the following areas of tech in 2023:

• Data Analytics – 64 %
• Prototyping and Testing – 58 %
• Automation – 57 %
• Data Sensing & Data Collection – 49 %
• Security Technologies – 35 %
• Power Technologies – 17 %

We can now conclude, as an R&D outsourced, boutique company, producing our own custom-designed Measurement and Sensing solutions – the above picture of the R&D leaders’ expectations is not a surprise for us.

This is because RVmagnetics not only has survived through the recessions of past years but we have also grown in sales, talent, and technological adversity – already being in closer cooperation with some of the world’s best firms in 2022, the kind of firms that realize in their reach experience, the utmost importance of innovation, research & development, especially during recessions, and especially looking into 2023.