Innovation has always been a key driver of success in the chemical industry. As innovations traditionally came from the core discipline such as basic chemical research, polymers or other, it is understandable that the first aspect that comes to mind when innovation is mentioned in chemical industry is a physical product or process technology. Although innovations in the chemical industry are not as visible as in consumer facing industries, it is chemical innovations that transformed almost every industry in the world.
While traditionally innovation in chemical industry understood to be related to physical product, there are other areas where innovation can be equally valuable for chemical producers and contribute to profitability. This includes innovation within company services, business model, product applications and processes. Additionally, service aspect in the chemical industry is gaining importance.
Areas for innovation in the chemical industry
Source: GPCA analysis, 2020
Economic impact analysis
Economic Cooperation and Development (OECD) estimated that a 1% increase in R&D spending can result in economic growth of 0.61%. This means that as countries invest more in R&D, their economy will grow faster. In chemical industry, impact of research and development has been quantified by the Council for Chemical Research (CCR). Based on their study, every dollar invested in R&D by the chemical industry generates two dollars in increased operating income.
R&D investment by the GCC chemical producers reached USD 479 million in 2019. This is 9% higher than in the previous year and exceeds a long-term average growth of 5.6% per annum. R&D intensity (measured as a share of R&D investment in sales in the chemical industry) in the GCC has improved in 2019 to 0.7% from 0.5% in the previous year. While demonstrating an improvement, the GCC is still far behind its main competitors. Among them, Japan remains one of the most important locations for R&D in the chemical industry, with the highest intensity of 3.9% (measured as share R&D investment in sales in the chemical industry), which is 6 times higher than in the GCC.
R&D Investment in the GCC Chemical Industry
Note: GPCA member companies only, R&D Intensity is measured as a share of R&D investment in sales in the chemical industry
Source: GPCA questionnaire, 2020
R&D investment performance globally and in the GCC
Note: World R&D intensity is based on 2018 figures, GCC R&D intensity is based on 2019 figures, R&D Intensity is measured as a share of R&D investment in sales in the chemical industry, GCC figures include GPCA member companies only
Source: CEFIC; GPCA analysis, 2020
The GCC region continues to remain only a minor R&D investor in the world arena accounting for 0.9% of global R&D spending. This is when GCC’s chemicals output represents about 6.6% of world’s total. Clearly, it will require some persistence to match the region’s share in R&D spending with its output share and increase its influence over the global innovation landscape.
Research centers is a core of innovation system not only on corporate level but also on the national level. The GCC chemical industry has put efforts in the last decades to develop scientific and technical infrastructure and establish corporate R&D centers in the region and abroad. Currently there are 19 R&D centers established by the GCC chemical producers in the GCC region. At the same time, GCC chemical producers have started to conduct R&D activities abroad. Technology intensity of product and services has increased significantly, making technology a key factor of competitiveness. Additionally, the complexities of global competition have increased with the new, more differentiated products and producers, resulting in a need for faster innovation. This competitive pressure made GCC chemical companies to open themselves for global R&D. GCC chemical producers have 29 overseas R&D centers with majority located in USA, followed by China and Germany. The main driver for this trend is proximity to end user customers, availability of researchers, specialized R&D knowledge in given destination.
Economic impact of R&D
Every R&D job in the GCC chemicals industry supports 5 jobs elsewhere in economy through indirect and induced channels (i.e. in the broad supply chain and through the procurement of goods and services). This is larger than the 3 jobs supported in the GCC chemical industry in overall, indicating that employment impact from R&D is relatively high and should be an incentive for R&D jobs creation in the region. Moreover, the indirect and induced jobs from R&D represent a significant share of 84% of total R&D jobs (direct, indirect, and induced).
Total gross value-added (GVA) from R&D in the GCC chemical industry is estimated at USD 711 million which is 0.9% of chemical industry total. Every USD 1 of gross value added directly created by the R&D activity supports an additional USD 1.6 elsewhere in economy. This is larger than the USD 0.76 supported by the GCC chemicals activity in overall, indicating again on high value addition of R&D activity.
These results suggest that encouraging R&D activity in the GCC region could bring substantial value added and employment benefits to the regional economy. R&D is the forefront of technological innovation in the chemical industry and offers benefits that spread wider than the industry itself, by raising productivity levels across the economy. Spillover benefits as a result of increased R&D activity are much broader than jobs supported and GDP contribution.
In today’s world companies must continue to innovate to meet realities of continuously emerging new technologies, markets, consumer demands. For some companies this means reinventing themselves or finding innovative ways to make their business relevant again. Chemical industry has reinvented itself throughout its existence multiple times. With highly innovative products from plastics to agri-nutrients, from textile dyes to explosives and medicines, chemistry transformed itself from alchemy into a value-capturing industry creating products with a high relevance and impact on society and other industries. GCC chemical industry has an enabling role and its innovation is vital not only for the industry itself but also for the innovation environment in the entire region.