National R&D Trends

The National Science Foundation (NSF) estimated that expenditures for R&D conducted in the United States would grow to $340 billion in 2006, continuing a pattern of growth largely uninterrupted since 1953, when these data were first collected (see sidebar, "Definitions of R&D"). As points of reference, U.S. R&D first exceeded $100 billion in 1984, $200 billion in 1997, and $300 billion in 2004. After adjusting for inflation, total R&D increased a projected 2.3% between 2005 and 2006, following an increase of 4.5% between 2004 and 2005.[1] These recent growth rates in R&D are in line with the average annual growth rates over the past two decades and are largely driven by increases in R&D expenditures in the business sector (figure 4-1figure.).

Official U.S. R&D data are derived by adding up the R&D expenditures for all sectors of the economy for which expenditures can be reasonably estimated. Generally these figures only include expenditures on projects that are recognized as R&D and that are separately budgeted and tracked by organizations, and therefore they do not represent the total expenditures on R&D and innovation in the economy. For example, the General Electric Company notes in its 2005 annual report that its R&D expenditures for 2005 were $3.4 billion, according to the definition of R&D required by generally accepted accounting principles in the United States. However, the report goes on to state, "For operating and management purposes, we consider amounts spent on product and services technology to include our reported R&D expenditures, but also amounts for improving our existing products and services, and the productivity of our plant, equipment, and processes. On this basis, our technology expenditures in 2005 were $5.2 billion" (GE 2006). For a description of other activities not captured in official U.S. R&D statistics, see sidebar, "Unmeasured R&D."

The U.S. innovation system comprises a diverse set of organizations, each with its own goals, priorities, and capabilities. These organizations include small businesses, MNCs, federal and state agencies, universities and colleges, research hospitals, and others. Because R&D often involves significant transfers of resources between organizations and sectors, the sections below analyze R&D both in the context of who is performing the R&D as well as in the context of who is funding the R&D.

Innovation—the introduction of new goods, services, or business processes in the marketplace—builds on new knowledge and technologies and contributes to national competitiveness and other social goals (NRC 2005b; OECD 2005; OSTP 2006). However, technology-based innovation activities include, but are not limited to, R&D. In response to the growing importance and complexity of these issues, the National Science and Technology Council, under the auspices of the White House Office of Science and Technology Policy (OSTP), has formed an Interagency Task Group on Science of Science Policy. The task group is analyzing federal and international efforts in science and innovation policy, identifying tools needed for new indicators and charting a strategic road map to improve theoretical frameworks, data, models, and methodologies. See also sidebar, "Recent Developments in Innovation-Related Metrics."

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Performers of R&D

Expenditures on R&D reported by R&D-performing organizations reflect the level of effort, in financial terms, expended on the creation of new knowledge and the use of that knowledge to devise new and improved S&T applications. However, these data in and of themselves do not indicate how successful or effective these efforts are, only how much money is spent on them. For a methodology to measure the role of R&D in economic growth, see sidebar, "The BEA/ NSF R&D Satellite Account."

Business Sector

In dollar terms, the business sector performed an estimated 71% ($242 billion of a total of $340 billion) of U.S. R&D in 2006 (figure 4-2figure.). The business sector's share of U.S. R&D peaked in 2000 at 75%, but following the stock market decline and subsequent economic slowdown of 2001 and 2002, the business activities of many R&D-performing firms were curtailed. As a result, business R&D declined by 2% per year in real terms between 2000 and 2003, and the industry share fell to 69% of the U.S. R&D total. Subsequently, R&D expenditures in the business sector grew by more than 3% per year in real terms between 2003 and 2006 and now account for 71% of the U.S. R&D total.

Of the estimated $242 billion of business sector R&D expenditures in 2006, $23 billion was funded by the federal government (table 4-1table.). Before the late 1960s, the federal government was the primary source of funding for business R&D, but it now accounts for less than 10% of all R&D performed by businesses in the United States. This decline in federal R&D funding as reported by businesses differs from the trend in R&D data collected from federal agencies. (For details on this discrepancy, see sidebar, "Tracking R&D: Gap Between Performer- and Source-Reported Expenditures" later in the chapter.)

Universities and Colleges

The next largest sector in terms of R&D performance is the academic sector. Universities and colleges performed almost $47 billion of R&D in 2006, one-fifth the amount performed by businesses in the United States. However, universities and colleges perform more than half (56%) the nation's basic research. (See the discussion of R&D by character of work that appears later in this chapter.) Universities and colleges rely much more than businesses on external sources of R&D funding. In 2006, slightly less than 20% of university and college R&D was funded by institutional funds, and more than 61% was funded by the federal government (table 4-1table.). In recent years, the amount of R&D performed by universities and colleges has grown faster than in any other sector of the U.S. economy. Academic R&D grew at an average annual 7.4% real rate between 2000 and 2003, but more recently this growth slowed to 1.9% per year in real terms between 2003 and 2006. See chapter 5 for a more detailed discussion of trends in academic R&D expenditures.

Federal Agencies and FFRDC

Federal agencies and federally funded research and development centers (FFRDCs) accounted for an estimated 11% of the R&D performed in the U.S. in 2006.[2] Although the amount of R&D performed by these organizations is small compared to the U.S. business sector, the $37 billion in R&D expenditures at these organizations exceeds the total national R&D expenditures of every country in the world other than China, Germany, and Japan. These expenditures also do not include the sizable investments the U.S. government has made in R&D infrastructure and equipment. The federal government often maintains research facilities and conducts research projects that would be too costly or risky for a single company or university to undertake. Largely as a result of increased defense spending following the terrorist attacks of September 11, 2001, expenditures for R&D conducted by federal agencies and FFRDCs grew at the rapid rate of almost 6.6% per year in real terms between 2000 and 2003. In terms of total U.S. R&D, this growth helped offset the decline in business sector R&D during that period. Since 2003, the real R&D expenditures at federal agencies and FFRDCs have remained basically flat. Federal R&D is discussed in more detail later in this chapter.

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R&D Funding

The funding for R&D conducted by organizations in the United States can come from a variety of sources, including the organizations' own funds as well as contracts and grants from other organizations. Although data on the flows of R&D funding within sectors (such as between two companies) is limited, data on the flows of R&D between sectors indicate that financial relationships between organizations play a significant role in the U.S. R&D system. In 2006, an estimated 20% of U.S. R&D ($67 billion) was funded by an organization in a different sector than the performing sector. Most of this intrasector R&D funding comes from the federal government, which funds significantly more R&D than it conducts in its own laboratories and FFRDCs (table 4-1table.). Unlike the federal government, most businesses spend their R&D budgets on either internal R&D projects or for contract R&D performed by other businesses (see the section entitled "Technology Linkages"). Less than 2% of business R&D funding flows to universities and other nonprofit organizations, although industry funded approximately 5% of all universities' 2006 R&D.

Federal R&D Funding

In 2006, the federal government is projected to have funded $94 billion of R&D as reported by performers of R&D, accounting for 28% of all R&D funding in the United States (figure 4-2figure.). The federal government was once the foremost sponsor of the nation's R&D, funding as much as 67% of all U.S. R&D in 1964 (figure 4-3figure.). The federal share first fell below 50% in 1979 and dropped to a low of 25% in 2000. The declining share of federal R&D funding is most evident in the business sector. In the late 1950s and early 1960s, more than half of the nation's business R&D was funded by the federal government, but by 2000, less than 10% of business R&D was federally funded. The decades-long trend of federal R&D funding shrinking as a share of the nation's total R&D reversed between 2000 and 2004. During this period, private investment slowed and federal spending on R&D expanded, reflecting initially and primarily increased research spending on health, and, more recently, development spending in the areas of defense and counterterrorism. By 2004, the federal share of the nation's R&D funding had increased to 30%. The federal share of R&D funding has since declined to an estimated 28% in 2006, as noted earlier.

Nonfederal R&D Funding

R&D funding from nonfederal sources reached an estimated $246 billion in 2006. Business sector funding dominates nonfederal R&D support. Besides performing the majority of U.S. R&D, the business sector also is the largest source of R&D funding in the United States, providing 66% ($223 billion) of total R&D funding in 2006 (figure 4-2figure.). The business sector's share of national R&D funding first surpassed the federal government's share in 1980. From 1980 to 1985, industrial support for R&D, in real dollars, grew at an average annual rate of almost 8%. This growth was maintained through both the mild 1980 recession and the more severe 1982 recession (figure 4-1figure.). Between 1985 and 1994, growth in R&D funding from industry was slower, averaging only 3% per year in real terms. However, from 1994 to 2000, industrial R&D support grew in real terms by more than 9% per year. This rapid growth rate came to a halt following the downturn in both the market valuation and economic demand for new technology during the first years of the 21st century. Between 2000 and 2002, industrial R&D support declined by more than 3% per year in real terms, but between 2002 and 2006, it grew by almost 3% per year in real terms.

Although R&D funding from other nonfederal sectors, namely academic and other nonprofit institutions and state and local governments, is small in comparison to federal and business R&D spending, it has grown rapidly. Between 1986 and 2006, funding from these sectors grew almost 6% per year in real terms, faster than R&D funding from either the federal or business sectors. Most of these funds went to research performed within the academic sector.

Unlike some other countries, the United States does not currently measure the amount of domestic R&D that is funded by foreign sources. However, data on investments of foreign MNCs provide some indication of this activity for the industrial sector (see the section entitled "R&D by Multinational Corporations" later in this chapter).

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R&D by Character of Work

R&D encompasses a wide range of activities, from fundamental research in the physical, life, and social sciences; to research addressing critical issues such as global climate change, energy efficiency, and disease; to the development of new and improved goods and services (from razor blades to fighter jets to business software). Because these activities are so diverse, it is helpful to group them into categories when analyzing R&D expenditures. Historically, the most common set of categories used to classify R&D are basic research, applied research, and development. The categories have been criticized by some economists and policymakers as being overly simplistic and reinforcing the idea that innovation is a linear process beginning with basic research, followed by applied research and development, and ending with the production and diffusion of technology. Although alternative models have been proposed, they have not been widely adopted by policymakers because of a lack of consensus about them and/or a lack of official data robust enough to support them.[3] Despite the difficulties in classifying specific R&D projects, the categories presented here help characterize the motivation, expected time horizons, outputs, and types of investments associated with R&D expenditures.

In 2006, the United States performed an estimated $62 billion of basic research, $75 billion of applied research, and $204 billion of development. As a share of all estimated 2006 R&D expenditures, basic research represented 18%, applied research represented 22%, and development represented 60% (figure 4-4figure.). Historically, the federal government has been the primary source of support for basic research. In 2006, federal funding accounted for 59% of U.S. basic research (figure 4-4). Moreover, in 2006 the federal government funded 64% of the basic research performed by universities and colleges, the largest performers of basic research in the United States. Industry devoted only a projected 4% of its total R&D support to basic research in 2006 (figure 4-5figure.). The reason for industry's relatively small contribution to basic research is that basic research generally involves a high degree of uncertainty with respect to the near-term commercial value of any discovery and the ability of the firm to enforce property rights over the discovery. However, firms may have other reasons for performing basic research above and beyond immediate commercial demands. For example, a company that supports basic research could boost its human capital (by attracting and retaining academically motivated scientists and engineers) and strengthen its innovative capacity (i.e., its ability to absorb external scientific and technological knowledge). The industries that invest the most in basic research are those whose new products are most directly tied to recent advances in S&T, such as the pharmaceuticals industry and the scientific R&D services industry.

The business sector spends more than four times as much on applied research as on basic research and accounts for more than half of U.S. applied research funding. In 2006, industry invested an estimated $44 billion in applied research funding, 59% of the U.S. total. Examples of industries that perform a relatively large amount of applied research are the chemicals industry, the aerospace industry (largely financed by the Department of Defense [DOD]), and the R&D services industry (encompassing many companies whose business is licensing technology). Although most of the federal investment in basic research supports research at universities and colleges, the majority of federally funded applied research is performed by federal agencies and FFRDCs.

Development expenditures totaled an estimated $204 billion in 2006, representing the majority of U.S. R&D expenditures. The development of new and improved goods, services, and processes is dominated by industry, which funded 83% of all U.S. development in 2006 ($169 billion). The federal government funded most of the remaining development performed in the United States, totaling 16% or $33 billion. Most federal development spending is defense related. The federal government generally invests in the development of such products as military aircraft, for which it is the only consumer. The business sector conducts even more development than it funds, accounting for 90% of all development conducted in the United States in 2006. Universities, colleges, and other nonprofit institutions conducted less than 2% of U.S. development. The balance of development is conducted by federal agencies and FFRDCs.

The OECD notes that in measuring R&D, possibly the greatest source of error "is the difficulty of locating the cutoff point between experimental development and the related activities required to realize an innovation" (OECD 2002). Most definitions of R&D set the cut-off point to be when a particular product or process reaches the point of "market readiness." At this point, the defining characteristics of the product or process (at least for manufacturers, if not also for services) are substantially set, and further work is primarily aimed at developing markets, doing preproduction planning, or getting a production or control system working smoothly.

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Notes

[1] In this chapter, adjustment for inflation is based on the GDP implicit price deflator. Because GDP deflators are calculated on an economywide rather than R&D-specific basis, their use should be interpreted as a measure of real resources forgone in engaging in R&D rather than in other activities (such as consumption or physical investment), and not a measure of cost changes in doing research. See appendix table 4-1.

[2] FFRDCs are R&D-performing organizations that are exclusively or substantially financed by the federal government either to meet a particular R&D objective or, in some instances, to provide major facilities at universities for research and associated training purposes. Each FFRDC is administered either by an industrial firm, a nonprofit institution, a university, or a consortium. In some of the statistics provided in this chapter, FFRDCs are included as part of the sector that administers them. In particular, statistics on the industrial sector often include industry-administered FFRDCs because some of the statistics from the NSF Survey of Industrial Research and Development before 2001 cannot be separated from the FFRDC component.

[3] See Godin (2006) for a history of the linear model of innovation.

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