Inside The Offices Of Spotify Ltd. As IPO Rumoured For Music Streaming Company
An employee works at a laptop computer. Photograph by Krisztian Bocsi—Bloomberg via Getty Images

Corporate R&D Is Shifting Big Time From Gadgets to Software and Services

Oct 25, 2016

Research and development spending by the world's biggest companies is accelerating into software and services while investment in physical products is falling sharply, an annual study by consulting firm PwC has found.

The study is both a reflection of current spending priorities by the top 1,000 companies in North America, Europe, Japan, China and the rest of the world, but also a benchmark against which many firms will judge their future growth plans.

The need to stay competitive was the main reason cited for the shift to software and services by decision-makers, as firms that are growing faster were found to spend 25% more of their budgets on software than slower-growing ones.

The 2016 Global Innovation 1000 Study released on Monday by PwC's "Strategy&" unit found that by 2018, the healthcare industry will overtake computer and electronic hardware as the top R&D sector, spending $165 billion versus $159 billion.

Now in its 11th year, the report highlights dramatic corporate budget shifts that are likely to affect decisions made about everything from competitive strategy to merger and acquisition plans to future hiring to meet new business demands.

"Companies will recruit less mechanical engineers and more software engineers," said Barry Jaruzelski, innovation and R&D expert for Strategy& and principal with PwC U.S.

The number of firms where electrical engineers are projected to be the top technical speciality will fall by more than one-third to 13% by 2020, while companies where data engineers predominate will double to 16% in the same time frame, the report said, posing challenges both for higher education and the job market.

The vast majority of acquisitions in the past five years—71%—added software or services capabilities, the study said.

By 2020, software and Internet R&D budgets of $129 billion are forecast to overtake automotive R&D at a projected $105 billion. This partly reflects an aggressive push by automakers and industrial firms to develop new software to connect up vehicles, assembly lines and finished products to the Internet.

Volkswagen was the single biggest spender on R&D of any company globally last year, splashing out $13.2 billion, or 5.6% of its revenue. Europe's biggest carmaker has ambitions to become a world leader in electric vehicles and car-sharing.

Pharmaecutical companies typically spend the highest proportion of their sales on R&D - from near 20 percent up to 36%—while computing giant Apple (aapl), the world's most valuable company, spent just 3.5%, the lowest in the top 20.

Total R&D spending by the world's top 1,000 companies is set to be flat this year at $679.8 billion, reflecting the impact of a stronger U.S. dollar. Absent currency moves, R&D spending would be up 6%.

All products and services featured are based solely on editorial selection. FORTUNE may receive compensation for some links to products and services on this website.

Quotes delayed at least 15 minutes. Market data provided by Interactive Data. ETF and Mutual Fund data provided by Morningstar, Inc. Dow Jones Terms & Conditions: S&P Index data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Terms & Conditions. Powered and implemented by Interactive Data Managed Solutions