Chapter 2:

U.S. and International Research and Development: Funds and Alliances

Trends in R&D Performance

U.S. R&D/GDP Ratio top

Growth in R&D expenditure should be examined in the context of the overall growth of the economy because, as a part of the economy itself, R&D is influenced by many of the same factors. Furthermore, the ratio of R&D expenditures to GDP may be interpreted as a measure of the Nation's commitment to R&D relative to other endeavors.

A review of U.S. R&D expenditures as a percentage of GDP over time shows an initial low of 1.36 percent in 1953 (when the NSF data series began), rising to its highest peak of 2.88 percent in 1964, followed by a gradual decline to 2.13 percent in 1978. (See figure 2-11.) R&D expenditures rose steadily again to a peak of 2.74 percent of GDP in 1985 and did not fall below 2.6 percent until 1993. In 1994, the ratio dropped to 2.43 percent-the lowest it had been since 1981. Starting in 1994, however, R&D/GDP has been on an upward trend as investments in R&D have outpaced growth on the general economy. As a result, the current ratio of 2.67 for 1998 is the highest since 1991.

The initial drop in the R&D/GDP ratio from its peak in 1964 largely reflected Federal cutbacks in defense and space R&D programs, although gains in energy R&D activities between 1975 and 1979 resulted in a relative stabilization of the ratio at around 2.2 percent. (See figure 2-11.) Over the entire 1965--78 period, the annual percentage increase in real R&D was less than the annual percentage increase in real GDP. In years when real R&D spending decreased during that period, real GDP also fell, but at a lower rate.

The rise in R&D/GDP from 1978 to 1985 was as much a result of a slowdown in GDP growth as to increased spending on R&D activities. For example, the 1980 and 1982 recessions resulted in a slight decline in real GDP, but there was no corresponding reduction in R&D spending. During previous recessions, changes in funding for R&D tended to match or exceed the adverse movements of broader economic measures.

R&D/GDP decreased from 2.74 percent in 1985 to 2.61 percent in 1989 but rose to 2.72 percent by 1991. (See figure 2-11.) Again, the ratio tended to fall when GDP experienced relatively fast real growth and rise when it experienced relatively slow real growth. Nevertheless, R&D itself was also affected. The share of R&D that was defense related dropped from 31.1 percent in 1985 to 22.6 percent in 1991. Commensurate with this change was the sharp fall in the share of R&D that was Federally funded-from 46.0 percent in 1985 to 37.8 percent in 1991. (See figure 2-3.) This decline in Federal funding was counterbalanced by increased non-Federal funding.

Rates of Growth Among Sectors top

The sectoral shares of U.S. R&D performance, measured in terms of expenditures, have shifted significantly since the early 1980s. (See figure 2-12.) In 1980, industry-including industry-administered FFRDCs-performed 70.3 percent of the Nation's R&D, the academic sector (including academically administered FFRDCs) accounted for 13.9 percent, the Federal Government performed 12.4 percent, and the nonprofit sector (including nonprofit-administered FFRDCs) performed 3.4 percent. As industry's defense-related R&D efforts accelerated in the early 1980s, its share of the performance total rose to 73.4 percent in 1985.

From 1985 to 1994, R&D performance grew by only 1.1 percent per year in real terms for all sectors combined. This growth was not evenly balanced across sectors, however. R&D performance at universities and colleges (including their FFRDCs) grew by 4.1 percent per year in real terms, compared with 0.7 percent real annual growth for industry, a decline of 0.7 percent per year for Federal intramural performance, and growth of 2.9 percent per year for nonprofit organizations (including their FFRDCs).

The period from 1994 to 1998 witnessed dramatic changes in these growth rates. Total R&D performance, in real terms, averaged 5.8 percent growth per year-substantially higher than in the earlier sluggish period. Yet R&D performance at universities and colleges (including their FFRDCs) grew by only 2.5 percent per year in real terms. Industry R&D performance (including their FFRDCs) grew at a remarkable rate of 7.6 percent in real terms. (See figure 2-7.) Federal intramural performance declined by 0.6 percent per year in real terms. Nonprofit organizations (including their FFRDCs), according to current estimates, saw their R&D increase by only 2.0 percent per year in real terms over the same four-year period.

According to preliminary estimates, in 1998 academia (including FFRDCs) accounted for 14.0 percent of total U.S. R&D performance, Federal intramural activities 7.6 percent, other nonprofit organizations (including FFRDCS) 3.0 percent, and private industry (including FFRDCS) 75.4 percent. (See text table 2-1.)

Federal R&D Performance top

The Federal Government, excluding FFRDCs, performed $17.2 billion of total U.S. R&D in 1998. This figure was slightly higher than the level for 1997 ($16.8 billion), which reflected only 1.2 percent growth after adjusting for inflation. Federal agencies accounted for 7.6 percent of the 1998 national R&D performance effort-continuing the gradual decline, since 1972, of Federal performance as a percentage of total R&D.

DOD has continued to perform more Federal intramural R&D than any other Federal agency; in fact, in 1998 it performed more than twice as much R&D as the next-largest R&D- performing agency, HHS (whose intramural R&D is performed primarily by NIH). (See text table 2-4.) DOD's intramural R&D performance has grown by less than 1 percent per year in real terms since FY 1980, however, reaching a level of $7.8 billion in FY 1998. Furthermore, an undetermined amount of DOD's intramural R&D ultimately appears to be contracted out to extramural performers. NASA's intramural R&D has grown by 1.7 percent per year in real terms since 1980, to $2.5 billion in FY 1998, while HHS intramural performance has grown by 3.7 percent, to $3.0 billion.[19] Together, these three agencies accounted for 77 percent of all Federal intramural R&D in FY 1998. (See text table 2-4.)

Total R&D performed by industrial, academic, and nonprofit FFRDCs combined reached $8.7 billion in 1998, which is essentially the same as its level of $8.4 billion in 1997 after adjusting for inflation. R&D at FFRDCs in 1998 represented 3.8 percent of the national R&D effort; most of this R&D ($5.5 billion in 1998) was performed by university- and college-administered FFRDCs.



[19] This increase represents the overall effect on intramural R&D for the agency, which takes into account the Social Security Administration (SSA) becoming a separate agency from HHS during fiscal year 1995. That is, the percentage increase reported would be larger, though negligibly, if HHS in 1995 had been defined as excluding SSA, as it is in 1996.

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