If in fact this scenario plays out, emerging markets in Asia could prove to be the superior play in the coming decades as they surpass America’s R&D investments.

R&D is the cornerstone of sustained growth. For example, China recognizes this by launching a branding campaign that turns the pejorative “made in China” to a higher value added “created in China.”

While some of the R&D numbers coming out of Asia today still may pale compared to the U.S., the important criteria is the percentage of GDP and overall growth that these emerging markets are investing in innovation.

For example, South Korea said last week it will allocate $8.3 billion on R&D in 2009. While that’s a drop in the bucket when measured against Washington’s $99 billion budget, the bottom line is that South Korea’s budget is an increase of 11% while the American budget is a decline of 0.34%.

A recent article in The Economist said that approximately $1 trillion is spent on R&D every year in computing, telecommunications and electronics of which the U.S. accounts for over 30%. But while corporate R&D in America and Europe grew by 1-2% between 2001 and 2006, in China’s R&D soared 23%, The Economist reported.  And as a percentage of GDP, China’s corporate R&D spending is almost on a par with the European Union’s (around 1%).

The Economist said that in 2007, South Korea’s Samsung spent more on R&D than IBM. The company has jumped to second place in the number of patents granted by America’s patent office (just behind IBM).

The trend could become irreversible if Washington favors bailouts over innovation.

The Georgia Institute of Technology’s bi-annual “High-Tech Indicators” study concluded that China improved its “technological standing” by 9 points over the period of 2005 to 2007, with the U.S. declining to of 6.8. In Georgia Tech’s scale of one to 100, China’s technological standing is pegged at 82.8, versus the U.S. at 76.1. The U.S. peaked at 95.4 in 1999. China has increased from 22.5 in 1996 to 82.8 in 2007.

Innovation is the fuel for growth and generates profits for investors. That could make Asia a better long-term play than the U.S. for investors.

It must now be horribly clear to everybody with an investment portfolio – indeed, to anyone who watches the financial markets – that no country or sector is safe from a bear market of the magnitude of the one we’re suffering through right now. When stocks get marked down en masse, as they have, literally everything drops.

What’s more, there may be very little rationale for which stocks drop — or how much they drop by: When the wave of selling meets very few buyers, good stocks can easily fall more than bad ones.

Does that mean it’s a waste of time to search for a “safe haven?”

Absolutely not. Assuming you have the fortitude to avoid selling during the worst of this mess, the storm will eventually blow itself out. At that point, investors will look around at the wreckage, and start figuring out which stocks represent good value. Good stocks and countries without major economic problems will then bounce – and bounce big.

A few smart cookies that stayed out of the market until it bottomed will buy them and win big. The rest of us – who didn’t see the storm coming, but who invested in “safe haven” stocks – will see the majority of our portfolio value restored fairly quickly, while other investments languish near the bottom, or even drop further, possibly even failing altogether.

It is difficult to assess which sectors will be best able to shrug off the storm (obviously housing and financial services remain highly vulnerable), but we can identify some alluring safe-haven countries by employing several rules. As you analyze markets around the world, look for a country that:

* Hasn’t had a major housing boom during the last few years. Housing-price declines of 30%, 40% or 50% make a huge mess of the country’s mortgage system, and the fallout can reach far beyond the housing sector itself. Apart from the United States, countries like Britain and Spain are to be avoided. In Great Britain, London housing and related real estate became almost as overvalued as 1980s Tokyo property – far outstripping anything that happened here in the United States. And Spain experienced massive overbuilding in resort areas – most of it highly speculative.

* Is competently run from a macroeconomic standpoint, without any great tendency toward huge bailouts or Keynesian deficit-spending projects. Japan qualified on these grounds until recently, but the new Prime Minister Taro Aso wants to increase the already-excessive budget deficit with infrastructure spending (thereby even further increasing Japan’s already-excessive public debt). Deficits are a real problem in a recession: They are difficult to finance, choke off potential private-sector investments, increase interest rates and may require damagingly large tax increases to sort out.

* Does not have a huge balance-of-payments deficit or large international debt – either of which becomes difficult to finance as capital flows decline.

* Has interest rates that are close to – or are above – its rate of inflation. Very low interest rates distort an economy, and generally necessitate unpleasant deflationary action at some point in order to avoid rapidly rising inflation.

Of the major global economies in which a U.S. investor might reasonably buy stocks, the four that really meet these criteria are Canada, Brazil, South Korea and Germany. Let’s take a close look at each one:

* Canada has just re-elected a conservative government, increasing its parliamentary representation. It has low inflation of around 3%, short-term interest rates just above 2%, a modest payments surplus and a modest budget surplus. It had a moderate housing boom, with prices rising about 65% in the 2000-2007 time frame, but its bank bailout was a quarter the size of the U.S. bailout, if measured in terms of gross domestic product (GDP). Canada is a well-balanced economy between commodities and manufactured goods; it will suffer from the U.S. downturn, but represents sound value over the longer term. The TSX Composite Index is down about 42% from its June 2008 peak, about the same as the U.S. market, but the Canadian economic picture appears to be much more sound. One last point: Although this certainly isn’t a make-or-break requirement, it is worth noting that investing icon Warren Buffett has made highly favorable comments about the Canadian economy.

* Brazil has reduced its foreign debt to about 40% of GDP and kept inflation under control at around 6% by running an admirably tight monetary policy, with a short-term rate of 13.75%. Its economy is primarily commodity-based, with a broad range of exports, but it also has a substantial manufacturing sector. The Bovespa stock index is down 62% from its May peak, and Brazilian stocks are distinctly cheap. Provided Brazil avoids a debt default, the bounce here should be a healthy one.

* South Korea elected a pro-business government in February. It is a major exporter of manufacturing goods and importer of commodities, which this year gave it a rare balance-of-payments deficit that should now reverse if commodity prices stay lower. Its banks avoided the U.S. subprime mortgage market, and are generally solid, although domestic lending is rather high. The country has an inflation rate of 5% and short-term interest rates – after an Oct. 27 cut – of 4.25%. Economic growth is around 4%, and the country boasts a budget surplus.  The stock market is down 55% from its October 2007 high, and should bounce significantly if commodity prices stay down.

* Germany is growing slowly – at a slow-but-steady 1% to 2% – but it has a static population, meaning that represents real per-capita growth. It had no recent housing boom (so no major domestic debt problem), and has low inflation, Germany also has improved its cost position considerably relative to its Eurozone neighbors, with a substantial balance-of-payments surplus, and is currently benefiting from the decline in East German restructuring costs, which hampered the economy during the decade and a half between 1990 and 2005.  The DAX stock market index is down 46% from its December 2007 high, meaning many bargains may be available. The main negative: Germany’s banks are quite heavily exposed to Eastern Europe, where several countries appear to have serious debt and balance-of-payment problems. If the problem is as big as some experts are starting to allege, this safe-haven candidate may need to be re-evaluated. But for now, Germany remains on our list.

Source: Four “Safe Haven” Markets For U.S. Investors