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April 7, 2018

Amazon’s Great R&D Gift to the Nation

President Donald Trump has made clear over the past few days that he really doesn't like Amazon.com Inc. The president has also made clear for even longer that he really doesn't like trade deficits. One way to reduce trade deficits is to spend money on research and development to come up with new products and services that U.S. businesses can sell around the world. And you know who appears to spend more on R&D than any other corporation on the planet? Why, Amazon.com Inc., of course! Amazon passed Volkswagen AG in late 2016 to become the world's biggest corporate R&D spender, and its hold on the No. 1 spot has only grown more secure since. One big caveat to this claim is that Amazon doesn't actually report R&D spending. Instead, it has a line item on its earnings statement for "technology and content" that investors and others (including me) have accepted as a proxy for R&D but isn't exactly the same. 1 Still, the online retail, cloud computing and digital entertainment behemoth from Seattle is clearly spending tons of money developing and refining new technologies, and its spending is increasing at a faster pace than that of other corporations. I've been putting together these R&D charts for a couple of years now, relying mostly on Bloomberg terminal data on publicly traded corporations but also, starting last year, including the R&D spending reported by two privately held giants, Chinese telecommunications equipment maker Huawei Investment & Holding Co. Ltd. and German auto-parts and appliance maker Robert Bosch GmbH. Huawei's annual report for 2017 finally came out last week, which is why I'm doing this column now. But the sudden increase in Amazon's political salience certainly makes it even more topical. The most straightforward explanation for the president's sudden obsession with Amazon is that he is trying to get back at the Washington Post, which has reported a lot of unflattering things about him and happens to be owned by Amazon founder and Chief Executive Officer Jeff Bezos. As media critic Jack Shafer put it in a Politico column Wednesday: "To do media organizations real harm, Trump understands that he must threaten some aspect of their business not protected by the penumbra of the First Amendment. This helps explain his administration’s opposition to the AT&T merger with Time Warner, which owns his media bête noire CNN. By jawboning against Amazon, Trump has deliberately caused its stock to dip." Still, some of Trump's complaints about Amazon's effect on brick-and-mortar retailers, its growing market power, its not-very-big tax bill, and its use or misuse of the U.S. Postal Service have also been voiced by people who aren't out to get the Washington Post. Amazon's size, clout and aggressiveness do raise all sorts of legitimate public-policy questions. But its outsized R&D spending should be part of this discussion, too. Research on R&D spending has shown it to have a pronounced positive effect on economic growth, and also to be linked to more positive trade balances (that is, smaller trade deficits). The evidence is more mixed on whether individual corporations benefit in a big way from their own R&D spending, and there's certainly anecdotal evidence of big companies failing to capitalize on their own quite valuable research. AT&T Inc.'s Bell Labs gave the world the transistor, the cellular telephone, the solar cell and lots of other inventions from which its parent captured a tiny fraction of the economic value. Researchers at Xerox Corp.'s Palo Alto Research Center developed technologies that, after significant tweaking, ended up being crucial to the success of Apple Inc., which now has a market capitalization more than 100 times that of Xerox.

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