Chapter 2:

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

Industrial R&D Performance

Recent Growth in Industrial R&D top

R&D performance by private industry reached $171.3 billion in 1998, including $2.4 billion spent by FFRDCs administered by industrial firms. This total represented a 7.6 percent increase over the 1997 level of $157.5 billion-which, in turn, reflected a smaller, though still notable, real gain of 6.9 percent over 1996.

In 1998, R&D performed by industry that was not Federally financed rose 8.7 percent in real terms above its 1997 level. Overall, private companies (excluding industry-administered FFRDCs) funded 86.8 percent ($146.7 billion) of their 1998 R&D performance, with the Federal Government funding nearly all of the rest ($22.2 billion, or 13.2 percent of the total). Between 1997 and 1998, there was little or no change, in real terms, in Federal funds for these industrial R&D activities. As recently as 1987, the Federal funding share of industry's performance total (excluding FFRDCs) was 31.9 percent; however, the Federal share of industry's performance has been steadily declining since its peak of 56.7 percent in 1959. Much of that decline can be attributed to declines in Federal funding to industry for defense-related R&D activities.

R&D in Manufacturing Versus Nonmanufacturing Industries top

The tendency for R&D to be performed more by large firms than small firms is greater in the manufacturing sector than in the nonmanufacturing sector. However, within each of these two sectors there is considerable variation in this regard, depending on the type of industry. Among industrial categories, those in which most of the R&D is conducted by large firms include aircraft and missiles, electrical equipment, professional and scientific instruments, transportation equipment (not including aircraft and missiles), and transportation and utilities (which is in the nonmanufacturing sector). (See text table 2-10.) In these sectors, however, much of the economic activity overall is carried out by large firms; consequently, the observation that most of the R&D in these sectors is conducted by large firms is not surprising.

Probably the most striking change in industrial R&D performance during the past two decades is the nonmanufacturing sector's increased prominence. Until the 1980s, little attention was paid to R&D conducted by nonmanufacturing companies, largely because service sector R&D activity was negligible compared to the R&D operations of companies in manufacturing industries.

Prior to 1983, nonmanufacturing industries accounted for less than 5 percent of the industry R&D total. By 1993, this percentage had risen to an all-time high of 26 percent. It has fallen only slightly since then and has remained above 22 percent.[20] (See text table 2-9 and figure 2-13.)

In 1997, nonmanufacturing firms' R&D performance totaled $36.5 billion-$32.4 billion in funds provided by companies and other non-Federal sources and $4.1 billion in Federal support. (See appendix tables 2-53 and 2-54.) The large upswing in the percentage of nonmanufacturing R&D primarily reflects a sharp rise in company-supported nonmanufacturing R&D from 1987 to 1991. (See figure 2-13.) Moreover, the recent drop in this percentage in 1995--97 is attributable not to any decrease in the level of R&D from nonmanufacturing companies but to a sharp increase in company-supported R&D by manufacturing firms.

Because of recent changes in classification, little historical information exists regarding the decomposition of R&D for all nonmanufacturing firms into nonmanufacturing industrial categories. In 1997, however, the largest component of R&D for nonmanufacturing companies was R&D performed by computer and data processing services, which accounted for 8.5 percent of all industrial R&D performance. (See text table 2-9.) Wholesale and retail trade account for another 6.0 percent, and engineering and management services account for 4.4 percent. The "research, development, and testing" sector accounted for 3.6 percent of total industrial R&D; communications services for 1.4 percent; and finance, insurance, and real estate services for 1.1 percent.

Although a great deal of R&D in the United States is related in some way to health services, companies that are specifically categorized in the health services sector accounted for only 0.5 percent of all industrial R&D and only 2 percent of all R&D by nonmanufacturing companies. These figures illustrate that R&D data disaggregated according to standard industrial categories (including the distinction between manufacturing and nonmanufacturing industries) may not always reflect the relative proportions of R&D devoted to particular types of scientific or engineering objectives or to particular fields of science or engineering.[21] (The analysis in "R&D in Chemistry, Life Sciences, and Information Technology" compensates to some extent for this limitation in the data by providing R&D expenditure levels associated with these fields.)

On average, industrial manufacturing R&D performers are quite different from industrial nonmanufacturing R&D performers. Nonmanufacturing R&D is characterized as having many more small R&D firms than manufacturing R&D performers. (See text table 2-10.) Approximately 35,000 firms in the United States perform R&D, of which 18,000 are manufacturers and 17,000 are in the nonmanufacturing sector-nearly a 50-50 split. Yet manufacturers account for 77 percent of total industry performance (including Federally funded industry performance). The main reason for this continued dominance of the manufacturing sector is simply that among manufacturing firms, the largest (in terms of number of employees) tend to perform a relatively large amount of R&D. Among small R&D-performing firms (fewer than 500 employees) in manufacturing and nonmanufacturing sectors, those in the nonmanufacturing sector tend to conduct twice as much R&D per firm as those in the manufacturing sector. Among large R&D-performing firms (more than 25,000 employees) in both sectors, however, those in the manufacturing sector tend to conduct more than 10 times as much R&D per firm as those in the nonmanufacturing sector.

Top 20 U.S. Corporations in R&D Spending top

Of the top 20 U.S. corporations in R&D expenditures in 1997 (see text table 2-11), only one-Microsoft Corporation, which had 22 thousand employees-had fewer than 25 thousand employees. The corporation that performed the most R&D in 1997 was General Motors ($8.2 billion); another company in the motor vehicle sector, Ford Motor Company, performed $6.3 billion in R&D. The next three corporations were IBM, Lucent Technologies, and Hewlett-Packard ($4.3, $3.1, and $3.1 billion in R&D, respectively). All of the top 20 corporations were associated with motor vehicle manufacturing, computers, communication equipment, or pharmaceuticals-with the exception of Procter and Gamble, which fell into the category of "other chemicals (soaps, ink, paints, fertilizers, explosives. . .)."[22]

R&D Intensity top

In addition to absolute levels of, and changes in, R&D expenditures, another key indicator of the health of industrial science and technology is R&D intensity. R&D is similar to sales, marketing, and general management expenses in that it is a discretionary (i.e., non-direct-revenue-producing) item that can be trimmed when profits are falling. There seems to be considerable evidence, however, that R&D enjoys a high degree of immunity from belt-tightening endeavors-even when the economy is faltering-because of its crucial role in laying the foundation for future growth and prosperity. Nevertheless, whether industry devotes the right amount of economic resources to R&D has remained an open question. (See sidebar, "Does Industry Under-Invest in R&D?")

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There are several ways to measure R&D intensity; the one used most frequently is the ratio of R&D funds to net sales.[23] This statistic provides a way to gauge the relative importance of R&D across industries and firms in the same industry.

The industrial sectors with the highest R&D intensities have been

Among these sectors, the highest R&D intensity (38.5 percent in 1997) is observed in research, development and testing services (which is not surprising because, in this special case, R&D is the actual product sold rather than a means toward acquiring a better product or production process). Computer data and processing services are second, at 13.3 percent, followed by drugs and medicines at 10.5 percent.[24] The "office, computing, and accounting machines" sector had an R&D intensity as high as 12.3 percent in 1987, but its R&D intensity fell to 9.2 percent by 1997.

Sectors that were lowest in R&D intensity in 1997 included

These sectors, in large part, reflect the "smokestack industries" that played a dominant role in the U.S. economy in the mid-1900s in terms of new directions of technological change.



[20]  As a result of a new sample design, industry R&D statistics since 1991 better reflect R&D performance among firms in the nonmanufacturing industries and small firms in all industries than they had previously. As a result of the new sample design, statistics for 1991 and later years are not directly comparable with statistics for 1990 and earlier years.

[21]  For a more detailed discussion of limitations in the interpretation of R&D levels by industrial categorization, see Payson (1997).

[22]  These data on R&D for individual corporations were obtained from a source that is different from the NSF Survey of Industrial Research and Development—namely, from the U.S. Corporate R&D database, as provided by Shepherd and Payson (NSF 1999e). Consequently, the definition of R&D in this case is not equivalent to that in the Industry R&D Survey. In particular, the U.S. Corporate R&D database derives from R&D reported in the Standard and Poor's Compustat database. As such, these R&D figures include R&D conducted by these companies outside the U.S., whereas the Industry R&D Survey includes only R&D performed within the U.S. Because of this difference in the data and other differences as outlined in NSF1999e, R&D data appearing in text table 2-11 and appendix table 2-58 should not be used in conjunction with R&D data originating from NSF's Industry R&D Survey.

[23] Another measure of R&D intensity is the ratio of R&D to "value added" (which is sales minus the cost of materials). Value added is often used in studies of productivity analysis because it allows analysts to focus on the economic output attributable to the specific industrial sector in question, by subtracting materials produced in other sectors. For a discussion of the connection between R&D intensity and technological progress, see, for example, Nelson (1988) and Payson (in press).

[24]  R&D outlays in the semiconductor equipment and materials industry are estimated to be about 12--15 percent of sales (Council on Competitiveness 1996). The broad industry classification system used in NSF's industrial R&D survey can mask pockets of high-tech activity.

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