Trends in National R&D Support

U.S. expenditures on research and development (R&D) are expected to reach $184.3 billion in 1996 (chart 2). This figure represents a 3 percent increase over preliminary 1995 expenditures ($178.6 billion in current dollars) or a 1 percent change after adjusting for expected inflation. 1 The 1995 level of R&D expenditures represents a 6 percent increase, in current dollars, over the 1994 level ($168.1 billion). In inflation-adjusted terms, total R&D expenditures rose by 4 percent in 1995, the largest real increase since 1985. However, growth in R&D continues to be outpaced by growth of the economy, as measured by gross domestic product. GDP growth between 1995 and 1996 is expected to be approximately 5.0 percent in current dollars, or 2.7 percent after adjusting for inflation.2

See appendix table C-3.

In 1996, the Federal Government will provide 33.6 percent ($61.9 billion in current dollars) of total projected funds for R&D; industry will supply 61.6 percent ($113.5 billion in current dollars); and the remaining sectors of the economy—i.e., State governments, universities and colleges, and other nonprofit institutions—will contribute 4.9 percent ($9.0 billion).

This funding of R&D continues the trend of slow growth in real R&D support which began in 1986. Not since the early 1970s has there been a period of such protracted low growth in national R&D support. Starting in 1969 and for nearly a decade thereafter, R&D growth failed to keep up with either inflation or general increases in economic output. In fact, between 1968 and 1975, real R&D expenditures declined 7 percent; this drop was due to a deemphasis by both business and Government on funding for research programs. Federal funding in particular fell considerably during this period (down 21 percent in real terms). Both Federal defense- and nondefense-related R&D programs declined (chart 2).

Following the economic recovery from the 1974 oil embargo and the 1975 recession, a significant funding reversal occurred. U.S. R&D expenditures increased in real terms by approximately 67 percent from 1975 to 1985, compared with a 33 percent rise in real GDP over the same period.

During the first half of this period (1975-80), there was considerable growth in Federal R&D funding for nondefense activities. Although defense-related R&D expenditures rose annually, much of the Federal R&D gain was attributable to energy-related R&D (particularly nuclear energy development) and to greater support for health-related R&D. Non-Federal R&D increases were concentrated in industry and resulted largely from greater emphasis on energy conservation and improved use of fossil fuels. Consequently, energy concerns fostered increases in R&D funding by both Federal and non-Federal sources. Support for energy R&D rose 140 percent in real terms between 1974 and 1979 and accounted for one-half of the national increase in real R&D spending.

Overall, the U.S. constant-dollar investment in total R&D grew at an average annual rate of 3.9 percent during 1975-80. Although the rate of increase remained rather steady through 1982 (approximately 4 percent annually), the focus of the national R&D effort began to shift heavily toward defense-related activities in the early 1980s. 3 Largely as a result of increases in defense R&D, growth in real R&D expenditures accelerated to an average annual rate of 8.1 percent over 1982-85: Not since the spending initiative toward space exploration in the early 1960s had R&D in the United States grown so rapidly during any 3-year period. On average, from 1980 to 1985, R&D spending increased 6.6 percent per year in real terms.

This pattern of a generally increasing rate of real R&D growth, however, changed abruptly in the mid-1980s. From 1985 to 1996, R&D spending slowed to a 1.4 percent annual real rate of increase, compared to a 2.6 annual real growth in GDP. Some slackening of both Federal and non-Federal funding of R&D as a proportion of GDP has contributed to this slowing. However, it is primarily the decline in real Federal R&D funding, as reported by R&D performers, that has contributed to the recent slowness of R&D growth.4

Trends in Federal Support

As a share of the national R&D total, Federal Government funding has continued to decline in recent years. Previously the primary provider of the Nation's R&D funds, the Federal Government's share of R&D funding first fell below 50 percent in 1978. From 1980 to 1988, the Federal Government accounted for between 45 and 47 percent of total R&D funding. The preliminary Federal R&D funding in 1996, $61.9 billion (chart 1), represents a 3 percent decline from the preliminary 1995 level in real terms. Consequently, the Federal Government's estimated share of R&D support for 1996, 33.6 percent, is the lowest recorded since the present data series began in 1953.5

Even with its declining share of the national total, Federal R&D funding grew from $41.4 billion in 1980 (in constant 1987 dollars) to a preliminary level of $47.4 billion in 1996 (in constant 1987 dollars); i.e., it grew by roughly 0.9 percent per year in real terms during this period. The rate of increase was strongest in the early 1980s and accounted for most of the gain for the entire decade. From 1980 to 1985, Federal R&D funding grew, on average, by 5.9 percent in real terms annually. Support then slowed considerably in 1986, reflecting the budgetary constraints imposed on all Government programs, including those mandated by the Balanced Budget and Emergency Deficit Control Act of 1985 (also known as the Gramm-Rudman-Hollings Act) and subsequent legislation (notably the Budget Enforcement Act of 1990, which legislated that new spending increases be offset with specific spending cuts). Since then, Federal R&D data reflect the Government's growing emphasis on deficit reduction and a shift in the balance between defense and domestic programs. Consequently, real Federal R&D support has declined on average by 1.4 percent per year over the 1985-96 period, by preliminary calculations.

Practically all the gain in Federal R&D funding during the early 1980s was due to large increases in defense spending, as evidenced by the figures on the U.S. budget authority (chart 3). For example, defense activities of the Department of Defense (DOD) and the Department of Energy (DOE) accounted for roughly one-half of total Federal R&D budget authorizations in 1980.6 By 1986, such defense-related spending peaked at 69 percent of the Federal R&D budget authority.

See appendix table C-23.

After 1986, Federal R&D spending priorities shifted—partially because of additional budgetary pressures, partially because of modifications in U.S. security measures in the international arena. Thus, the defense buildup in the early and mid-1980s was followed by a period of moderate reductions in the late 1980s; a leveling of R&D spending in the early 1990s; and a return to planned, moderate reductions in the mid-1990s. Since 1986, the Federal budget authority for civilian-related R&D has grown faster than defense-related R&D. In particular, the budget allocation for health- and space-related R&D increased substantially between 1986 and 1996, with average real annual growth rates of 4.7 and 7.2 percent, respectively, using preliminary figures for 1996. The budget allocation for defense programs declined by an average real annual rate of 2.7 percent during the same period. As a result, in 1996, defense-related R&D accounts for an estimated 54.7 percent of the year's total Federal R&D budget authority, in contrast to 69.3 percent for 1986.

Based on preliminary figures, R&D accounts for more than 14 percent of the Federal defense-related budget authority for 1996, and 3 percent of the Federal nondefense authority (table 1). In nondefense areas, R&D accounts for 69 percent of general science funds, nearly all of which (94 percent) is devoted to basic research (table 2). R&D accounts for 63 percent of funds for space research and technology, most of which (63 percent) is devoted to development. In total Federal health funding, R&D represents 11 percent, most of which ($6.4 billion out of $11.9 billion) is devoted to basic research (table 2), and nearly all of which (95 percent) is directed toward programs of the National Institutes of Health (NIH).

Federally funded R&D on energy actually exceeds the total Federal budget authority for all energy-related activities. This is because the Department of Energy, through the sale of assets in 1996, had substantially more funds to spend in that year than it received from the Federal budget. Consequently, federally funded energy R&D as a percentage of the total budget for energy-based activities in 1996 is 125.9 percent (table 1).

For the Nation as a whole, defense-related R&D climbed from 24.1 percent of the total R&D effort in 1980 to 31.7 percent in 1987. In 1996, defense-related R&D fell to 17.9 percent of total R&D expenditures, according to preliminary findings (chart 4). These shares by national objective represent a distribution of performer-reported R&D data. They are distinct from the budget authority shares reported above which are based on the various functional categories that comprise the Federal budget. (See appendix A.) Between 1982 and 1996, space-related R&D funding has annually accounted for between 3 and 5 percent of the national R&D total.

See appendix table C-14.

With regard to "civilian-related" R&D (nondefense-nonspace programs), Federal funding accounts for 11.7 percent of total R&D (Federal and non-Federal) in 1996, by preliminary calculations (table C-14). This percentage is not much higher than it was in 1993, 10.6 percent, which was the lowest it had been since 1962. Such federally supported, civilian-related R&D as a percentage of all U.S. R&D reached a peak of 18.6 percent in 1979, but has remained relatively constant—between 10 and 12 percent—since 1986.

Preliminary estimates of Federal R&D obligations for 1996 indicate that seven Federal agencies have R&D obligations of over $1 billion: DOD, DOE, the Department of Health and Human Services (HHS), the National Aeronautics and Space Administration (NASA), NSF, and the Departments of Agriculture and Commerce. DOD has the largest share (49 percent) of Federal R&D obligations ($33.7 billion), followed by HHS (17.2 percent), NASA (11.8 percent), DOE (9.9 percent), NSF (3.3 percent), Department of Agriculture (2.0 percent), and Department of Commerce (1.9 percent) (table 3).

See appendix table C-1.

In contrast to total R&D obligations, only three agencies have intramural R&D expenditures that exceed $1.0 billion in 1996, including costs associated with planning and administering extramural R&D programs: DOD, HHS (which includes NIH), and NASA.7 These three agencies together account for 77.9 percent of all Federal R&D obligations for 1996, and 75.0 percent of Federal intramural R&D.

Trends in Non-Federal Support

Concurrent with the 1980-85 gains in Federal R&D spending, R&D support from non-Federal sources also grew substantially—by 7.2 percent per year after inflation during this period. However, between 1985 and 1996, by preliminary calculations, growth of non-Federal real R&D funding slowed considerably, to an average annual rate of 3.3 percent.

Most non-Federal R&D support is provided by industry. Of the projected 1996 non-Federal total ($122.4 billion in current dollars), 92.7 percent ($113.5 billion) is company funded. This level of industry funding represents a real increase of 3.5 percent over its 1995 level. Industry's share of national R&D funding had first surpassed that of the Federal Government in 1980, and it has remained higher ever since. From 1980 to 1985, industrial support for R&D grew, in real terms, at an average annual rate of 7.3 percent. This growth was maintained through both the mild 1980 recession and the more severe 1982 recession (chart 5). Key factors behind increases in industrial R&D included a growing concern with international competition, especially in high-technology industries; the increasing technological sophistication of products, processes, and services; and general growth in defense-related industries such as electronics, aircraft, and missiles.

See appendix table C-3.

Between 1985 and 1994, growth in R&D funding by industry was much slower than previously, averaging only 2.8 percent per year in real terms. The growth in industrial R&D funding was only slightly greater than the growth of the economy (2.5 percent) over the same period in terms of real GDP. However, on the basis of preliminary figures for 1995 and 1996, industrial R&D support from 1994 to 1996 grew, in real terms, by 4.8 percent per year, compared with a 3.0 percent real annual growth in the economy over the same period.

While these figures indicate general trends, as an examination of the industrial sector in the aggregate, they reveal little about the underlying factors influencing R&D performance or support, because R&D budget decisions vary substantially across different industries. Thus, trends in industrial R&D may be as much dependent on specific factors affecting specific industries within the economy as they are dependent on global factors that affect all industries as a whole.

Companies with the largest annual growth in real R&D performance from non-Federal sources between 1984 and 1994 have been in the following industrial sectors: nonmanufacturing8 (18.1 percent); chemicals and allied products, rubber products, and other manufacturing industries9 (each slightly more than 4.4 percent); and paper and allied products (slightly under 4.4 percent). Those industries experiencing the greatest annual declines (negative growth) in R&D over the same period were: stone, clay, and glass products (-5.5 percent); machinery (-4.7 percent); petroleum refining and extraction (-4.6 percent); and primary metals (-3.4 percent) (table 4).

See appendix tables C-1 and C-30.

National R&D funding from other non-Federal sectors—namely academic and other nonprofit institutions, including the support they receive from State and local governments—has been generally more consistent over time. It grew at an average annual real rate of 4.6 percent between 1980 and 1985, and, by preliminary calculations, 5.2 percent between 1985 and 1996. The projected $9.0 billion in funding in 1996 is virtually unchanged in real terms (only 0.3 percent higher) from its 1995 level. Most of these R&D dollars are used for research within the academic sector.


Footnotes

1For a discussion of how dollar amounts are adjusted for inflation in this report, see appendix A, section on "Controlling for Inflation and Foreign Currency."

2 Expressions like "R&D growth in 1996" and "R&D growth between 1995 and 1996" are equivalent, because both measure the change in R&D from year-end 1995 to year-end 1996. When intervals are given, the comparison is made between year-end figures for the years mentioned, e.g., "R&D growth in 1990-1996" refers to the change from year-end 1990 to year-end 1996.

3Industry R&D expenditures on energy and pollution abatement also slowed at this time. In fact, in 1981 and 1982, such expenditures increased at only one-third the rate reported for the previous 4 years.

4In recent years, increasing differences have been detected in data on federally financed R&D as reported by Federal funding agencies, on the one hand, and by performers of the work (Federal labs, industry, universities, and other nonprofit organizations), on the other hand. This divergence in R&D totals is discussed in appendix A (and tables B-1 and B-2).

5The sample design for estimating industry R&D expenditures was revised for 1991 and later years. The effect of the change in industry's sample design was to reduce the Federal share of the national R&D total to 38 percent in 1991, down from the 41 percent share previously published for that year. See appendix A (and table B-4) for more information on these survey changes and their impact on R&D estimates.

6These percentage share calculations of defense-related R&D expenditures are based on Federal budget authorization totals, not on data reported by the performers of R&D.

7Estimates are for FY 1996 Federal intramural obligations as reflected in the administration's 1997 budget proposal (see appendix A) and cover costs associated with planning and administering intramural and extramural R&D programs by Federal personnel as well as actual intramural R&D performance. See NSF, Federal Funds for Research and Development: Fiscal Years 1994, 1995, and 1996, NSF 94-328 (Arlington, VA, 1996).

8See appendix A, section on "Use of `Nonmanufacturing' as a Single Industrial Category." Also note that, as a result of recent improvements (since 1992) in the NSF sampling of firms located in the service sector, it is not clear to what extent the nonmanufacturing sector has rapidly expanded its share of the Nation's R&D, or how much of the apparent increase is due solely to improved measurement techniques.

9These include companies in Standard Industrial Classification Codes 27, 31, and 39, which are, respectively: printing, publishing, and allied industries; leather and leather products; and miscellaneous manufacturing industries (e.g., jewelry, musical instruments, toys, pens, burial caskets, and scenery for theaters).


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