Technology Linkages: Contract R&D, Trade in R&D Services, Business Alliances,
and Federal Technology Transfer

Collaboration with external technology sources, including universities and federal laboratories, has long played a key role in U.S. industrial innovation (Bozeman 2000; Mowery 1983; Rosenberg and Nelson 1994). Increasingly, however, industrial innovation requires partners, resources, and ideas outside company and national boundaries (Chesbrough, Vanhaverbeke, and West 2006; EIU 2006; IBM 2006; IRI 2007). (See sidebar, "A Window Into Open or Collaborative Innovation.") Factors behind this trend include the complex and multidisciplinary nature of scientific research, coupled with the increased relevance of science for industrial technology in a globally competitive environment. Several terms in the academic and business literature capture diverse but related dimensions of this new environment, including open or collaborative innovation, networked R&D, innovation sourcing, and technology markets.[32] The resulting exchanges or joint activities involve customers, suppliers, competitors, and public institutions such as universities and government agencies.

Major channels to acquire or codevelop knowledge and technologies include alliances or partnerships, external R&D services, and technology licensing. Each may interact differently with internal R&D and each present different risks and benefits in terms of innovation strategies and management (Cassiman and Veugelers 2002; Fey and Birkinshaw 2005). In turn, each channel has different implications for public policies aiming at promoting innovation. Indeed, public policies in advanced economies concerned with enhancing growth have evolved to address the many dimensions of industrial innovation. Several policies in the United States have facilitated R&D collaboration among industry, universities, and federal laboratories since the 1980s (see sidebar, "Major Federal Legislation Related to Cooperative R&D and Technology Transfer").

This section discusses three different types of indicators of knowledge flows and technology linkages: transactions involving R&D, business alliances, and technology transfer from federal sources. Indicators of transactions include domestic contract R&D by R&D-performing companies, exports by U.S. establishments classified in the R&D services industry, and international transactions of R&D services by all companies located in the United States. Not surprisingly, there are differences in scope and methodology across the different sources, as detailed throughout this section. However, each source explores complementary dimensions in the complex web of domestic and international transactions involving R&D and R&D-related services.

Contract R&D Expenses Within the United States

R&D-performing companies in the United States reported $11.7 billion (including $8.9 billion reported by manufacturers) in R&D contracted out to other domestic companies and other organizations in 2005, compared with $12.3 billion in 2004, according to NSF data (appendix table 4-50Excel.).[33] The ratio of contracted-out R&D to company-funded, company-performed R&D declined from 6.6% in 2004 to 5.7% for all industries in 2005 but remained above 6% for manufacturing (figure 4-31figure.). However, since 1993, these contracted-out expenditures have grown faster than company-funded, company-performed expenditures.

The relative magnitude of payments for R&D conducted by others varies across industries. In 2005, pharmaceutical companies reported $4.6 billion in contracted-out R&D (appendix table 4-51Excel.), or 13.2 % of their company-funded, company-performed R&D, followed by scientific R&D services (11.4%); navigational, measuring, electromedical, and control instruments (7.9%); and motor vehicles, trailers, and parts (7.2%). The ratio was only 2.8% for companies classified in computer and electronic products.

For most of the industries highlighted above, close to 80% of contracted-out R&D payments were received by other companies. For scientific R&D services, however, only 53% of these expenditures were received by other companies.[34]

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International Trade in R&D Services

The international flow of knowledge through trade in services represents the convergence of two recent trends: an increase in R&D performance in the service sector and an increase in transactions with external parties (Arora, Fosfuri, and Gambardella 2001; OECD 2006c). U.S. R&D-related trade in services is a relatively new indicator of international industrial knowledge and technology flows. Other such indicators include FDI, trade in high-technology goods, patent royalties, and license fees (see the section entitled "R&D by Multinational Corporations" and also chapter 6). Trade in R&D and technical services are also key to understanding the growing role of services in the U.S. economy and the extent and impact of services "offshoring " (GAO 2004; Graham 2007; NAPA 2006).[35]

Exports by R&D Services Establishments

The Service Annual Survey (SAS) conducted by the Census Bureau provides national estimates of total revenues, export revenue, and expenses of establishments (single physical locations at which business is conducted and/or services are provided) classified in NAICS service industries.[36] Scientific R&D services (NAICS 5417) cover establishments devoted primarily to R&D, either as stand-alone enterprises or within larger companies.[37] Newly available data on export revenues for this industry are based on revenues for basic and applied research, production services for development, testing services, and licensing of intellectual property. In 2005, U.S. establishments classified in NAICS 54171 (physical, engineering, and life sciences) exported $3.0 billion in R&D services, or 3.9% of their total revenue ($76.4 billion) (table 4-20table.). Notably, this proportion was about twice as large as the export revenue share for all professional, scientific, and technical services in 2004 and 2005.

Exports and Imports of R&D Services

The preceding discussion of R&D services exports was based on establishments classified in a specific industry sector. The present section examines patterns in services trade, regardless of industry classification, and focuses on research, development, and testing (RDT) services.[38] Since 2001, these data have been available for two major categories of customers or suppliers: trade among unaffiliated companies and trade among affiliates of MNCs. In 2005, total exports (affiliated and unaffiliated) of RDT services reached a record $10.1 billion, compared with record imports of $6.7 billion, resulting in a trade surplus of $3.4 billion (figure 4-32figure.). This trade surplus is little changed from the $3.8 billion surplus in 2004 but smaller than trade surpluses (approximately $5 billion) in both 2002 and 2003. Affiliated exports and imports have been larger than unaffiliated exports and imports (table 4-21table.). Furthermore, affiliated trade has recorded trade surpluses between $4 billion and $5 billion since 2001. However, unaffiliated trade moved from relatively small surpluses (less than $500 million) in the 1990s to small deficits in the early 2000s, reaching a deficit of slightly more than a billion dollars in 2005 (appendix table 4-52Excel.) (NSF/SRS 2006c).

The prominence of affiliated trade in business services, particularly R&D-related services, may reflect advantages of internally managing, exploiting, and protecting complex or strategic transactions involving proprietary technical information (Caves 1996; McEvily, Eisenhardt, and Prescott 2004). For the United States, the large size of affiliated relative to unaffiliated trade in RDT services is consistent with strong U.S. FDI activity, which increases the number of potential affiliated trading partners. It is also consistent with expanded MNC R&D (see the section entitled "R&D by Multinational Corporations"), which increases opportunities for intracompany knowledge flows.

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Business Technology Alliances

Industrial technology alliances bring together legally distinct companies for the purpose of collaboration in R&D and other technology activities.[39] Business alliances represent an intermediate organizational mode between full integration (as in mergers and acquisitions or FDI) and arms-length transactions (as in contracts for R&D services with external parties). Drivers for R&D collaboration include cost and risk reductions afforded by pooling resources, strategic or long-term considerations regarding the acquisition of innovation capabilities or entry into new product markets, and the policy environment, notably antitrust regulation and intellectual property protection. In the United States, restrictions on multifirm cooperative research were loosened by the National Cooperative Research Act in 1984 (Public Law 98–462), given concerns about the technological leadership and international competitiveness of American firms in the early 1980s.[40]

The Cooperative Agreements and Technology Indicators database-Maastricht Economic Research Institute on Innovation and Technology (CATI-MERIT), funded in part by NSF, includes domestic and international technology agreements. It is based on public announcements, tabulated according to the country of ownership of the parent companies involved.[41] According to this database, in 2003 (latest data available) there were 695 new industrial technology alliances worldwide (figure 4-33figure.). These alliances involve mostly companies from the United States, Europe, and Japan, focusing to a large extent on biotechnology and information technology products, services, or techniques. Other technology areas include advanced materials, aerospace and defense, automotive, and (nonbiotechnology) chemicals. For additional details, see Hagedoorn (2002) and NSB (2006).

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Federal Technology Transfer and S&T Programs

In the late 1980s, concerns about U.S. industrial strength and global competitiveness led to a series of legislative changes that facilitated public-private partnerships involving industry, universities, and government laboratories (NRC 2003). These partnerships can facilitate technology transfer from the research laboratory to the market in support of both public agencies' missions and technology-based economic growth. Federal technology transfer statutes apply to federally owned or originated technology (see sidebar, "Major Federal Legislation Related to Cooperative R&D and Technology Transfer"). Federal technology indicators include government-owned patents, licensing, and cooperative research and development agreements (CRADAs). This section covers federal technology transfer metrics and federal S&T programs.

Technology Transfer Metrics

R&D performed at federal laboratories, whether run by federal agencies themselves or by contractors,[42] represents a key source for knowledge and technologies supporting both federal agency missions such as defense, health, and energy, as well as economic growth, and general social welfare (Crow and Bozeman 1998; RAND 2003). Technology transfer refers to the exchange or sharing of knowledge, skills, or technologies from sources to users within or across organizations. Federal technology transfer activities and metrics reflect the variety of agency missions, R&D organization and funding structure (e.g., intramural versus extramural laboratories), the character of R&D activities, and the types of potential downstream technologies or users.

For example, scientific or technical publications are a major channel for disseminating R&D results by agencies with large intramural basic research such as NIH (at HHS). Agencies also offer direct technical assistance to private users in settings such as agricultural extension services (USDA), manufacturing extension services (NIST), and federal laboratories (e.g., DOE and NIST). DOE laboratories and FFRDCs offer technical assistance to industrial and academic researchers in the form of user facilities agreements and "work-for-others" agreements. User facilities are advanced scientific facilities, equipment, and software available at DOE laboratories. Work-for-others is work performed for nonfederal sponsors (DOE 2006). In FY 2005, DOE reported about 2,400 work-for-others-agreements and about 2,800 user facility agreements (DOE 2006). In addition, all major U.S. R&D funding agencies, including DOD, HHS, NASA, DOE, and NSF, participate in technology transfer programs involving small businesses and technology entrepreneurs, as described below.

A major technology transfer channel involves cooperative R&D. In particular, CRADAs are agreements between federal laboratories and industrial firms and other organizations for joint R&D activities with the potential to promote industrial innovation consistent with the agency's mission. Private partners may retain ownership rights or acquire exclusive licensing rights for the developed technologies. Federal agencies are engaged in about 3,000 CRADAs annually (NSB 2006), including about 1,500 reported by DOD and 661 by DOE in FY 2003 (latest year available with comparable CRADA data across agencies).

A different set of federal technology transfer metrics involves intellectual property measures such as invention disclosures, patents, and licenses (for academic and corporate patents, see chapters 5 and 6, respectively). Invention disclosures may or may not result in a patent application. Patent and invention licenses (which include licenses of patented inventions) are indicators further along the chain of the technology transfer process in which laboratory results may find applications in agency missions or the marketplace. Table 4-22table. shows the 2005 distribution for these metrics for selected agencies.[43] DOE and DOD had the largest shares of inventions disclosed and patents, whereas NIH/FDA had the largest share of new invention licenses, according to available data. Differences in R&D funding structure (intramural versus extramural funding) and the R&D character of work across agencies may drive the agency distribution of these indicators (table 4-8table.).[44]

S&T Programs

S&T programs support the development of early-stage technologies and are key components in the dynamics of technology-based entrepreneurship and innovation (Audretsch, Aldridge, and Oetll 2005; Branscomb and Auerswald 2002). This section briefly describes trends in the Small Business Innovation Research (SBIR) program, the Small Business Technology Transfer Program (STTR), and the Advanced Technology Program (ATP) through the latest data available. The section ends with a brief description of the Technology Innovation Program, which replaces ATP.

The SBIR program, created in 1982, leverages existing federal R&D funding toward small companies (those with 500 or fewer employees).[45] SBIR's sister program, the STTR program, was created in 1992 to stimulate cooperative R&D and technology transfer involving small businesses and nonprofit organizations, including universities and FFRDCs.[46]

Statutory goals of the SBIR program include the promotion of technological innovation through commercialization of federally funded projects and increasing the participation of small firms and companies owned by minorities or disadvantaged individuals in the procurement of federal R&D. The 1992 SBIR reauthorization bill[47] stipulated a stronger emphasis on the technology commercialization objectives of the program (NRC 2007).

According to the SBIR statute, federal agencies with extramural R&D obligations exceeding $100 million must set aside a fixed percentage of such obligations for SBIR projects. This set-aside has been 2.5% since FY 1997. As of FY 2005, a total of 11 federal agencies participated in the program, including most recently DHS.[48] SBIR has awarded $118.8 billion to more than 89,000 projects through FY 2005. Funded technology areas include computers and electronics, information services, materials, energy, and life sciences applications. In FY 2005, the program awarded $1.9 billion in R&D funding to 6,171 projects (figure 4-34figure.). The upward trend in awards and funding reflects both the increased set-aside percentage over the history of the program, as well as trends in federal funds for extramural R&D. DOD and HHS combined have provided between 60% and 80% of total annual SBIR funds since the program's inception (appendix table 4-54Excel.).

STTR involves cooperative R&D performed jointly by small businesses and nonprofit research organizations.[49] As of FY 2005, five federal agencies with extramural R&D budgets exceeding $1 billion participate in the STTR program: DOD, NSF, DOE, NASA, and HHS. Starting in FY 2004, the required set-aside rose from 0.15% to 0.3%, compared with the 2.5% set-aside for SBIR. From FY 1994 to FY 2005, STTR awarded $1.04 billion to 5,000 projects, including $220 million to 832 projects in FY 2005 (appendix table 4-55Excel.).

ATP was established by the Omnibus Trade and Competitiveness Act of 1988 to promote the development and commercialization of generic or broad-based technologies.[50] Through FY 2004, ATP awarded funds for 768 projects with a combined funding of $4.37 billion, about equally split between the program and its participants. The projects have involved more than 1,500 participants, which include established companies and start-ups as well as universities and other nonprofit institutions (appendix table 4-56Excel.). In FY 2004, 59 R&D projects were initiated, totaling $270 million in combined program and industry funds. The program received $79 million in FY 2006 and an estimated $40 million in FY 2007. The America COMPETES Act (Public Law 110–69 signed in August 2007) replaced ATP in favor of a successor program, the Technology Innovation Program (TIP) also housed at the DOC's National Institute of Standards and Technology.[51] The goal of the program is to assist U.S. "businesses and institutions of higher education or other organizations, such as national laboratories and nonprofit research institutions, to support, promote, and accelerate innovation in the United States through high-risk, high-reward research in areas of critical national need."[52]

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Notes

[32] For example, see Arora, Fosfuri, and Gambardella (2001); Bozeman (2000); and Chesbrough, Vanhaverbeke, and West (2006).

[33] Data are for R&D contract expenditures paid by U.S. industrial R&D performers (using company and other nonfederal R&D funds) to other domestic performers. In this section, contract R&D refers to a transaction with external parties involving R&D payments or income, regardless of its legal form. Transactions by companies that do not perform internal R&D in the United States are excluded, as are R&D activities contracted out to companies located overseas.

[34] Approximately 3% of expenditures involved universities and colleges, and 44% involved "other R&D performers."

[35] Offshoring refers to the sourcing of production inputs through companies located overseas. Offshoring may be done internally through controlled subsidiaries or affiliates, which involves FDI and related transactions (e.g., affiliated trade), or through external providers. The latter is part of outsourcing activities that in general involve either domestic or overseas external suppliers.

[36] Revenue data include operating surplus and other generally acceptable charges for services rendered. For SAS methodology and sample forms, see Census Bureau (2007).

[37] Note that except for small companies with a single physical location, company-based and establishment-based industry data are not comparable, even when they refer to the same metric. Furthermore, NSF data for companies classified in NAICS 5417 refer to R&D expenditures, whereas SAS data covered in this section refer to total exports by establishments classified in NAICS 5417. SAS data for establishments classified in professional, scientific, and technical services (NAICS 54) are available since 1998. SAS data for R&D services (NAICS 5417) is available for R&D in the physical, engineering, and life sciences (54171) and social sciences and humanities (54172). Data used in this section are limited to the former. For case studies in services industries, including the scientific R&D services industry, see Gallaher and Petrusa (2006).

[38] The category of RDT services is part of business, professional, and technical services (or business services, for short). The latter include royalties and license fees, discussed in chapter 6.

[39] Technology alliances may or may not be part of larger agreements involving manufacturing, licensing, or other forms of business collaboration. For recent studies on the role of technology licensing (e.g., technology development, commercialization strategy), see Fosfuri (2006) and Hagedoorn, Lorenz-Orlean, and Kranenburg (2007).

[40] As amended by the National Cooperative Research and Production Act of 1993 (Public Law 103–42). See U.S.C. Title 15, Chapter 69. More recently, federal patent and trademark law was amended in order to facilitate patenting inventions resulting from collaborative efforts across different companies or organizations. The amendment was instituted by the Cooperative Research and Technology Enhancement (CREATE) Act of 2004 (Public Law 108–453) and applies to patents resulting from joint research as long as the claimed invention is within the scope of a written contract, grant, or cooperative agreement and made by or on behalf of the parties to the agreement.

[41] CATI-MERIT is a literature-based database that draws on sources such as newspapers, journal articles, books, and specialized journals that report on business events. It includes business alliances with an R&D or technology component, such as joint research or development agreements, R&D contracts, and equity joint ventures. Agreements involving small firms and certain technology fields are likely to be underrepresented. Another limitation is that the database draws primarily from English-language materials. No data on alliance duration or termination date are available.

[42] Federal laboratories are facilities owned, leased, or otherwise used by a federal agency, according to 15 U.S.C. 3710a(d)(2). They include, for example, intramural laboratories (e.g., the laboratories owned by NIH's National Cancer Institute) and government-owned, contractor-operated laboratories such as some of DOE's FFRDCs. See also the section entitled "Federal R&D."

[43] For additional metrics and agencies up to FY 2003, see chapter 4 in NSB (2006), based on data from DOC, Office of the Secretary, Summary Report on Federal Laboratory Technology Transfer: FY 2003 Activity Metrics and Outcomes, 2004 Report to the President and the Congress Under the Technology Transfer and Commercialization Act (2004). An updated report was not available at the time of writing.

[44] For studies on patents, citations, and other technology transfer metrics at NASA and DOE, see chapters 9 and 10, respectively, in Jaffe and Trajtenberg (2001). For technology transfer activities and case studies involving USDA R&D, see Heisey et al. (2006).

[45] SBIR was created by the Small Business Innovation Development Act of 1982 (Public Law 97–219, U.S.C. Title 15, Section 631). It was last reauthorized in 2000 through September 2008. The 2000 reauthorization bill (Public Law 106–554) also requested that the National Research Council conduct a multiyear SBIR study at five federal agencies with SBIR budgets exceeding $50 million (DOD, HHS, NASA, DOE, and NSF). The study is in progress. See NRC (2007) and National Academies (2007).

[46] STTR was created by the Small Business Technology Transfer Act of 1992 (Title II of the Small Business Research and Development Enhancement Act, Public Law 102–564). It was last reauthorized by the Small Business Technology Transfer Program Reauthorization Act of 2001 (Public Law 107–50) through FY 2009.

[47] Title I of the Small Business Research and Development Enhancement Act, Public Law 102–564.

[48] To obtain this federal funding, a small company applies for a Phase I SBIR grant of up to $100,000 for up to 6 months to assess the scientific and technical feasibility of ideas with commercial potential. If the concept shows further potential, the company can receive a Phase II grant of up to $750,000 over a period of up to 2 years for further development. In Phase III, the innovation must be brought to market with private-sector investment and support; no SBIR funds may be used for Phase III activities.

[49] STTR is also structured in three phases.

[50] Public Law 100–418; 15 U.S.C. Section 278n.

[51] According to the America COMPETES Act, TIP will "continue to provide support originally awarded under [ATP], in accordance with the terms of the original award and consistent with the goals of the Technology Innovation Program." See Library of Congress (2007). For more information on the new bill, see sidebar, "Recent Developments in Innovation-Related Metrics."

[52] See Library of Congress (2007).

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