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Science and Engineering Indicators 2004
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Chapter 4:
National R&D Trends

Federal R&D Performance and Funding

Technology Linkages: Contract R&D, Federal Technology Transfer, and R&D Collaboration
International R&D Trends and Comparisons
R&D Investments by Multinational Corporations
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Figure 4-1

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Figure 4-2

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Figure 4-3

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Figure 4-4

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Figure 4-5

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Figure 4-6

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Figure 4-7

U.S. and International Research and Development: Funds and Technology Linkages

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National R&D Trends

Trends in R&D Performance
Trends in Federal R&D Funding
Trends in Non-Federal R&D Funding
U.S. R&D/GDP Ratio
Sectoral Composition of R&D Performance
Trends in R&D by Character of Work
Industrial R&D by Industry, Firm Size, and R&D Intensity
R&D Performance by State

In the mid- to late 1990s, R&D performance in the United States surged.[1] In real terms (constant or inflation-adjusted dollars), total R&D performance grew 40.5 percent between 1994 and 2000 at an average annual real growth rate of 5.8 percent over the period (figure 4-1 figure). National Science Foundation (NSF) data indicate that this growth rate was not sustained in the following 2 years, slowing to an estimated 1 percent between 2000 and 2001 and just keeping pace with inflation between 2001 and 2002. Total 2002 R&D performance in the United States is estimated to be $276.2 billion, up from an estimated $273.6 billion in 2001 and $264.7 billion in 2000.[2] (See sidebar, "Definitions of R&D.")

In comparison, GDP, the main measure of the nation's total economic activity, grew in real terms by 3.8 percent per year between 1994 and 2000. R&D performance as a proportion of GDP rose from 2.40 percent in 1994 to 2.69 percent in 2000 as growth in R&D outpaced the growth of the overall economy. The slowdown in R&D investment in 2001 and 2002 coincided with an overall economic slow-down in the United States, resulting in R&D to GDP ratios of 2.71 percent in 2001 and 2.64 percent in 2002.[3]

Organizations that perform R&D often receive outside funding; conversely, organizations that fund R&D often do not perform all the R&D themselves. Therefore, it is useful to analyze R&D expenditure data in terms of who performed the R&D and who funded it.

Industry performs most of the nation's R&D and accounted for 70.4 percent of total R&D performance in 2002.[4] Universities and colleges, excluding academically administered federally funded research and development centers (FFRDCs), accounted for 13.0 percent of national R&D performance in 2002, followed by the Federal Government (8.6 percent) and nonprofit institutions (4.2 percent).[5] All FFRDCs combined performed 3.7 percent of U.S. total R&D in 2002 (figures 4-1 figure and figure 4-2 figure; table 4-1 text table).

Private industry is also the largest source of R&D funding in the United States and provided 65.5 percent ($180.8 billion) of total R&D funding in 2002. Most of these funds (98.1 percent) flowed to industrial performers of R&D. The Federal Government provided the second largest share of R&D funding, 28.3 percent ($78.2 billion), with only 43.6 percent of these funds financing Federal labs and FFRDCs. The other sectors of the economy (i.e., state governments, universities and colleges, and nonprofit institutions) contributed the remaining 6.2 percent ($17.2 billion) (table 4-1 text table).

Trends in R&D Performance top of page

U.S. R&D has experienced largely uninterrupted growth over the past 50 years (figure 4-1 figure). U.S. R&D performance grew each year between 1953 and 2002, even in the early 1990s when both Federal and industrial R&D funding slowed significantly[6] (figure 4-3 figure). In the mid-1990s substantial increases in industrial R&D, most notably in the computer and other information technology (IT) sectors and in small R&D-performing firms, ended a brief slowdown in national R&D growth.[7] Between 1994 and 2000, an 8.9 percent real annual growth rate in industrial support for R&D overshadowed a slight decline (-0.3 percent per year) in Federal R&D support, resulting in overall real annual growth of 5.8 percent in U.S. R&D.

More recently, the growth of R&D investment in the United States has slowed. Preliminary data indicate that although total R&D expenditures continued to rise through 2002, industrial R&D, which fueled the growth over the prior period, failed to keep pace with inflation and experienced its first decline in real terms after 1994. This has occurred only six times in the past 49 years. The business activities of many R&D-performing firms were curtailed following the stock market decline and subsequent economic slowdown of 2001 and 2002. The same sectors that saw impressive increases in the late 1990s experienced declines in sales, share prices, and R&D investment at the beginning of the 21st century.

Trends in Federal R&D Funding top of page

Increases in Federal R&D investment, particularly in the areas of defense, health, and counterterrorism, helped to offset the slowdown in industrial R&D in 2001 and 2002. These increases also reversed a decades-long trend in the shrinking share of Federal R&D funding as a percentage of the nation's total R&D (figure 4-4 figure).

The Federal Government was once the main source of the nation's R&D funds, funding as much as 66.7 percent of all U.S. R&D in 1964. The Federal share first fell below 50 percent in 1979, and after 1987 it fell steadily, dropping from 46.3 percent in that year to 25.1 percent in 2000 (the lowest it has ever been since the start of the time series in 1953). This sharp decline in the Federal Government share, however, should not be misinterpreted as a drastic decline in the actual amount of R&D funded (figure 4-3 figure). Adjusting for inflation, Federal support decreased 18 percent from 1987 to 2000, although in nominal terms, Federal support grew from $58.5 billion to $66.4 billion during that period. Growth in industrial funding generally outpaced growth in Federal support, leading to the decline in Federal support as a proportion of the total. The slowdown of industry's investment in R&D, as well as increases in Federal R&D funding in recent years, reversed this trend. Thus in 2002, the Federal share of R&D funding is estimated to have grown to 28.3 percent.

Trends in Non-Federal R&D Funding top of page

R&D financing from non-Federal sources grew by 7.6 percent per year after inflation between 1980 and 1985, concurrent with gains in Federal R&D spending. This growth rate slowed to 3.3 percent between 1985 and 1994 but rose to 8.6 percent during the 1994–2000 period. More recently, between 2000 and 2002, non-Federal sources of R&D funding declined by 1.8 percent per year in real terms.

As previously discussed, most non-Federal R&D support is provided by industry. Of the 2002 non-Federal support total ($198 billion), 91.4 percent ($181 billion) was company funded. Industry's share of national R&D funding first surpassed the Federal Government's in 1980, and it has remained higher ever since. From 1980 to 1985, industrial support for R&D, in real dollars, grew at an average annual rate of 7.7 percent. This growth was maintained through both the mild 1980 recession and the more severe 1982 recession (figure 4-3 figure). 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 such defense-related industries as electronics, aircraft, and missiles. Between 1985 and 1994, growth in R&D funding from industry was slower, averaging only 3.1 percent per year in real terms, but from 1994 to 2000 industrial R&D support grew in real terms by 8.9 percent per year. This rapid growth rate came to a halt following the downturn in both the market valuation and economic demand for technology in the first years of the 21st century. Between 2000 and 2002 industrial R&D support declined by 2.5 percent per year in real terms.

Although industrial firms provide only a small portion of the R&D funding at U.S. universities and colleges (6.5 percent in 2002), their funding of academic research has grown faster than any other sector over the past 2 decades. Between 1980 and 2000, industry's funding of academic R&D grew at an average annual rate of 7.7 percent after adjusting for inflation, outpacing total academic R&D, which grew at an average annual rate of 4.8 percent over the same period. Growth in industry's funding of academic R&D has since slowed to an average annual rate of 1.9 percent between 2000 and 2002, indicating that this source of funding is not immune to economic forces, although apparently more so than industry's R&D funding of industry itself.

R&D funding from other non-Federal sectors, namely, academic and other nonprofit institutions and state and local governments, has been more consistent over time, growing at an average annual rate of 6.3 percent between 1980 and 2002 after adjusting for inflation. Most of these funds went to research performed within the academic sector.

U.S. R&D/GDP Ratio top of page

Economists often use the ratio of R&D expenditures to GDP to examine R&D in the context of a nation's overall economy. This ratio reflects the intensity of R&D activity in relation to other economic activity and is often interpreted as a relative measure of a nation's commitment to R&D.

Since 1953, the first year for which national R&D data are available, U.S. R&D expenditures as a percentage of GDP have ranged from a minimum of 1.36 percent (in 1953) to a maximum of 2.87 percent (in 1964) (figure 4-5 figure). From 1994 to 2001, R&D outpaced growth of the general economy and the R&D/GDP ratio rose close to its historic high. It is estimated that the amount of R&D performed in the United States equaled 2.71 percent of the United States GDP in 2001 and 2.64 percent in 2002.[8]

Most of the growth over time in the R&D/GDP ratio can be attributed to steady increases in non-Federal R&D spending.[9] Nonfederally financed R&D, the majority of which is company financed, increased from 0.63 percent of GDP in 1953 to an estimated 1.90 percent of GDP in 2002 (down from a high of 2.02 percent of GDP in 2000). The increase in nonfederally financed R&D as a percentage of GDP illustrated in figure 4-5 figure corresponds to an upward trend in R&D and technology intensive activities in the U.S. economy.

Historically, most of the peaks and valleys in the R&D/GDP ratio can be attributed to changing priorities in Federal R&D spending. The initial drop in the R&D/GDP ratio from its peak in 1964 largely reflects Federal cutbacks in defense and space R&D programs. Gains in energy R&D activities between 1975 and 1979 resulted in a relative stabilization of the ratio. Beginning in the late 1980s, cuts in defense-related R&D kept Federal R&D spending from keeping pace with GDP growth, whereas growth in non-Federal sources of R&D spending generally kept pace with or exceeded GDP growth. (See the discussion of defense-related R&D in the next section.)

Sectoral Composition of R&D Performance top of page

Since the early 1980s, R&D performance in some sectors has grown much faster than in others. The industrial sector in particular has grown increasingly dominant (figure 4-1 figure). In 1980, industry performed 68.4 percent of the nation's R&D, the academic sector performed 10.2 percent, laboratories within Federal agencies (Federal intramural R&D) performed 12.4 percent, and the nonprofit sector performed 2.6 percent. All FFRDCs combined performed 6.5 percent of the nation's R&D. Industry's defense-related R&D efforts accelerated in the early 1980s, and its share of R&D performance rose to 71.8 percent in 1985.

From 1985 to 1994, R&D performance grew by only 1.4 percent per year in real terms for all sectors combined. This growth was not evenly balanced across performing sectors, however. R&D performance at universities and colleges grew by 5.4 percent per year in real terms, compared with only 1.0 percent for industry, -0.5 percent for Federal intramural performance, 5.0 percent for nonprofit organizations, and 0.4 percent for all FFRDCs combined.

The 1994–2000 period was one of dramatic changes for these growth rates. Total R&D performance in real terms averaged 5.8 percent growth per year, which was substantially higher than in the earlier sluggish period. Yet, R&D performance at universities and colleges grew at a slower rate of 4.1 percent per year in real terms.[10] Industrial R&D expanded at a remarkable rate of 7.1 percent in real terms (despite a decline in company-reported Federal financing of R&D). Federal intramural performance decreased by 0.3 percent per year in real terms. Nonprofit organizations, according to current estimates, increased their R&D performance by 7.1 percent per year in real terms over the same 6-year period. Finally, R&D performance at all FFRDCs combined declined by 0.1 percent per year in real terms in this period.

Industry is expected to have performed 70.4 percent of the nation's total R&D in 2002 (table 4-1 text table). The estimated $194.4 billion in industrial R&D performance represents a 2.5 percent average annual decrease in real terms from the 2000 level. Of the industrial R&D performed in 2002, 91.2 percent was funded by industry; the remaining 8.8 percent was federally funded. The federally funded share of industry's R&D performance total has fallen considerably from 31.9 percent in 1987.

Universities and colleges are estimated to have performed 13.0 percent ($36.0 billion) of national R&D in 2002, an average annual increase of 6.6 percent in real terms over their share in 2000. The Federal Government performed 8.6 percent ($23.8 billion) of U.S. R&D in 2002, an average annual increase in real terms of 13.3 percent over the 2000–2002 period. All FFRDCs combined performed an estimated $10.3 billion of R&D in 2002, or 3.7 percent of the U.S. total. The nonprofit sector performed an estimated $11.6 billion in 2002, or 4.2 percent of the U.S. total.

Trends in R&D by Character of Work top of page

Because research and development encompasses a broad range of activities, it is helpful to disaggregate R&D expenditures into the traditional categories of basic research, applied research, and development. Despite the difficulties in classifying specific R&D projects, these categories are useful for characterizing the expected time horizons, outputs, and types of investments associated with R&D expenditures.

In 2002 the United States performed an estimated $49.6 billion of basic research, $64.8 billion of applied research, and $161.8 billion of development (table 4-1 text table). As a share of all 2002 R&D expenditures, basic research represented 17.9 percent, applied research represented 23.5 percent, and development represented 58.6 percent.

Basic Research

In 2002, universities and colleges performed 53.8 percent of basic research, more than any other sector. The intellectual freedom and diversity of these institutions make them ideally suited to carry out basic research. Industry performed an estimated 15.6 percent of U.S. basic research in 2002. Rather than serve an immediate market need, the basic research performed by a firm with industry funds serves to strengthen the innovative capacity of the firm by developing human capital and increasing the capability of the firm to absorb external scientific and technological knowledge.

The Federal Government, estimated to have provided 58.9 percent of basic research funding in 2002, historically has provided the majority of funding for basic research (figure 4-6 figure). Moreover, the Federal Government funded 61.8 percent of the basic research performed by universities and colleges in 2002. Industry devoted only an estimated 5 percent of its total R&D support to basic research in 2002, representing 18.5 percent of the national total. The reason for industry's relatively small contribution to basic research is that basic research generally involves the most uncertainty in terms of both the technical success and the commercial value of any results in the three broad categories of R&D. The industries that invest the most in basic research are those whose new products and services are most directly linked to advances in science and engineering, such as the pharmaceuticals industry and the scientific R&D services industry.

Applied Research

Nonacademic institutions perform the majority of U.S. applied research, which totaled $64.8 billion in 2002. Industrial performers accounted for 65.7 percent of all applied research, with the remainder largely performed by Federal laboratories (12.5 percent) and universities and colleges (12.4 percent). Industrial support accounts for 61.5 percent ($39.8 billion) of the 2002 total for applied research and Federal support for 31.6 percent ($20.5 billion). The Federal Government's investment in research has historically emphasized basic research over applied research, reflecting the belief that the private sector is less likely to invest in basic research. In 2002, Federal funding for applied research was 70 percent of that for basic research.

Within industry, applied research acts to refine and adapt existing scientific knowledge and technology into knowledge and techniques useful for creating or improving products, processes, or services. The level of applied research in an industry reflects both the market demand for substantially (as opposed to cosmetically) new and improved goods and services as well as the level of effort required to transition from basic research to technically and economically feasible concepts. Examples of industries that perform a relatively large amount of applied research are the semiconductor industry and the biotechnology industry.


Development expenditures totaled an estimated $161.8 billion in 2002, representing the majority of U.S. R&D expenditures. The development of new and improved goods, services, and processes is dominated by industry, which performed 89.0 percent of all U.S. development in 2002. Federal laboratories and FFRDCs performed an estimated 9.1 percent of U.S. development; the remainder was performed by universities and colleges and nonprofit institutions.

Industry and the Federal Government together funded 99.0 percent of all development in 2002, with industry providing 81.4 percent and the Federal Government providing 17.6 percent. The Federal Government generally invests in the development of such products as tactical nuclear weapons and space exploration vehicles, for which it is the only consumer. The Federal investment in development is dominated by the Department of Defense (DOD), which invests 85 percent of its R&D funds in development (figure 4-7 figure). For more information about Federal R&D funding by agency and character of work, see "R&D by Federal Agency."

Investments in development differ from investments in basic and applied research in that they are relatively short-term in nature and tend to depreciate in value relatively rapidly.[11] To track its longer-term investments in S&T, the Federal Government excludes much of its spending on development in favor of focusing on basic and applied research and other investments in R&D plant and S&E education. For more information, see "Federal S&T Budget" in "Federal R&D Funding by National Objective."

Industrial R&D by Industry, Firm Size, and R&D Intensity top of page

The level of industrial R&D is one indicator of industry's commitment at any point in time to the production of new and improved products, services, and processes. R&D expenditures, like those for advertising, are discretionary and are set by firms at levels intended to maximize future profits. R&D expenditures therefore indicate both the importance that R&D is accorded with respect to other discretionary spending as well as firms' perceptions of the demand for new and improved technology. Of particular importance is industrial R&D that is financed by the private sector as opposed to the Federal Government. The broad themes explored in this section include the strong rise in industry-funded R&D, the rise of service-sector R&D after the early 1980s, a restructuring of U.S. industrial R&D that is partially related to changes in service-sector R&D trends, and R&D intensities as a tool for industry analysis.

As previously described, R&D performed by private industry reached $194.4 billion in 2002. This total represents a 2.5 percent average annual decline in real terms from the 2000 level of $197.6 billion. Most of this decline was in industry-financed R&D. Companies funded 91.2 percent ($177.3 billion) of their 2002 R&D performance, with the Federal Government funding nearly all the rest ($17.1 billion, or 8.8 percent of the total). For more than a decade the largest component of R&D in the United States has been performed by private industry through private industry's own funds. (Some of this funding is supported through venture capital investments. For a discussion of the relationship between venture capital and R&D expenditures, see chapter 6.) This component of U.S. R&D grew from 43 percent of total R&D in 1953 to 64 percent in 2002.

R&D in Nonmanufacturing Industries

Until the 1980s, little attention was paid to R&D performed by nonmanufacturing companies largely because R&D activity in the service sector was negligible compared with the R&D operations of manufacturing companies. Before 1983, nonmanufacturing industries accounted for less than 5 percent of total industrial R&D performance (including industry-administered FFRDCs), but by 2001 (the most current year for detailed data on industrial R&D), they accounted for 39.2 percent.[12] In 2001, firms classified in nonmanufacturing industries performed $77.8 billion of R&D ($72.4 billion in funds provided by companies and other non-Federal sources and $5.4 billion in Federal support) (table 4-2 text table). Of this amount, 79 percent ($56.9 billion) can be attributed to trade, software and computer-related services, and scientific R&D services.[13] An examination of these three groups of industries helps explain the dramatic growth in nonmanufacturing R&D over the past 2 decades.

R&D performance attributed to the trade industry reached $24.4 billion in 2001. Although some of this R&D was performed by companies whose primary business was wholesale or retail trade, there is little doubt that this sum includes more than just the activities of retailers. A known consequence of assigning firms to one industry based on payroll data—the classification method used for the NSF Industry R&D Survey—is that a company can be classified in an industry that is not directly related to its reported R&D activities.[14] Although imperfect, this classification scheme reasonably categorizes all but the most diversified companies into industries closely aligned with their primary business activities. The classification of firms into the trade industry is one exception to this assertion because the sale and marketing of goods and services, a trade activity, is often a significant activity in both manufacturing and nonmanufacturing firms. A large pharmaceutical firm or diversified conglomerate would be classified in the trade industry if the payroll associated with its sales and marketing efforts outweighed that of any other industrial activity in the company. One indication of these classification artifacts is that in 2001, 86 percent of the R&D attributed to the trade industry was performed by companies with total R&D programs in excess of $100 million, whereas companies in the same size category accounted for only 42 percent of the R&D in all other nonmanufacturing industries combined. Another indication is that more than $1 billion of biotechnology R&D was reported by companies classified in the trade industry in 2001.

Nonmanufacturing industries associated with software and computer-related services such as data processing and systems design performed approximately $24.0 billion of company-funded R&D in 2001.[15] As computing and IT became more powerful, flexible, and ubiquitous over the past 2 decades, the demand for services associated with these technologies boomed. The R&D of companies providing these services also grew dramatically during this period. In 1987, when an upper-bound estimate of software and other computer-related services R&D first became available, companies classified in the industry group "computer programming, data processing, other computer-related, engineering, architectural, and surveying services" performed $2.4 billion of company-funded R&D, or 3.8 percent of all company-funded industrial R&D. In 2001 the company-funded R&D of a comparable group of industries (excluding engineering and architectural services) was greater by a factor of 10 and accounted for 13.2 percent of all company-funded industrial R&D[16] (table 4-3 text table). This trend in the growth of software and computer-related services R&D shows no sign of slowing. Despite essentially no growth in total company-funded, industry-performed R&D between 2000 and 2001, the company-funded R&D for this group of industries grew by 10 percent.

The R&D performed by companies in the scientific R&D services industry more than doubled in the 4 years between 1997 and 2001 from $7.0 to $14.2 billion.[17] The portion of this industry's R&D that was company-funded increased at an even faster pace, from $4.7 billion in 1997 to $10.9 billion in 2001. The scientific R&D services industry comprises companies that specialize in conducting R&D for other organizations, such as many biotechnology companies. (See sidebar, "Biotechnology R&D in Industry.") Although these companies and their R&D activities are classified as nonmanufacturing because they provide business services, many of the industries they serve are manufacturing industries. This implies that the R&D activities of a research firm that services a manufacturer would have been classified as R&D in manufacturing if the same research firm were a subsidiary of the manufacturer. Consequently, a growth in measured R&D in services may, in part, "reflect a more general pattern of industry's increasing reliance on outsourcing and contract R&D" (Jankowski 2001). (For more information, see "Contract R&D.")

Although a great deal of R&D in the United States is related in some way to health care services, companies specifically categorized in the health care services sector accounted for only 0.4 percent of all industrial R&D and for only 1.0 percent of all R&D by nonmanufacturing companies. As in many industries, innovation often results from R&D performed in other industries, in this case the pharmaceutical, scientific instrument, and software industries in particular. These results illustrate that R&D data disaggregated according to 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.

R&D in Manufacturing Industries

Within the manufacturing industries, three groups dominate: computer and electronic products, transportation equipment, and chemicals (table 4-2 text table). In 2001, computer and electronic products accounted for the largest amount of R&D performed among all industries at $47.1 billion, or 23.7 percent of all industrial R&D and 39.0 percent of all manufacturing R&D. For this subsector, industrial firms provided $41.2 billion in R&D support and the Federal Government funded the remainder.

In 2001, transportation equipment accounted for the second most R&D performed in the manufacturing sector at $26.0 billion, or 13.1 percent of all industrial R&D. Of these expenditures, 19.1 percent was federally funded, primarily for R&D on aerospace products (planes, missiles, and space vehicles). In addition to aerospace products, this subsector includes a variety of other forms of transportation equipment, such as motor vehicles, ships, military armored vehicles, locomotives, and smaller vehicles such as motorcycles, bicycles, and snowmobiles.

In 2001, chemicals ranked third in R&D performed in the manufacturing subsector at $17.9 billion, approximately 1 percent of which was federally funded. In terms of R&D performance, the largest industry within the chemicals subsector is pharmaceuticals and medicines. In 2001, R&D performed by these companies accounted for 61 percent of non-Federal R&D funding in the chemicals subsector ($12.9 billion).

Industrial R&D and Firm Size

Manufacturing R&D performers are typically quite different from nonmanufacturing R&D performers. Manufacturing R&D performers tend to be larger firms that perform more R&D on average than nonmanufacturing firms (table 4-5 text table). Approximately 33,000 firms in the United States performed R&D in 2001; of these, 51 percent were in the manufacturing sector. Manufacturers account for an even greater share (61 percent) of total industrial R&D performance. As a share of the nation's GDP, on the other hand, manufacturing contributes less than 20 percent. Manufacturers dominate in terms of R&D performance largely because of the activities of the largest manufacturing firms. In 2001 the largest manufacturing firms (those with 25,000 or more employees) accounted for 49 percent of the R&D in the manufacturing sector, whereas nonmanufacturing firms in the same size category accounted for only 25 percent of total nonmanufacturing R&D.[18]

Among small R&D-performing firms (those with less than 500 employees), those in the nonmanufacturing sector conduct significantly more R&D than those in the manufacturing sector, both in aggregate and on a per-firm basis. These small firms accounted for 12 percent of manufacturing R&D, 31 percent of nonmanufacturing R&D, and 19 percent of all industrial R&D in 2001.

Although R&D tends to be performed by large firms in the manufacturing sector and smaller firms in the nonmanufacturing sector, considerable variation can be found within each sector, depending on the type of industry. R&D tends to be conducted primarily by large firms in several industrial subsectors: aircraft and missiles; electrical equipment; professional and scientific instruments; transportation equipment (not including aircraft and missiles); and transportation and utilities, which are in the nonmanufacturing sector. In these same sectors, however, much of the economic activity occurs in large firms to begin with, so the observation that most of the R&D in these sectors is also conducted by large firms is not surprising.

R&D Intensity

In addition to absolute levels of and changes in R&D expenditures, another key indicator of industrial commitment to S&T is R&D intensity, a measure of R&D relative to production in a company, industry, or sector. For most firms, R&D is similar to sales, marketing, and general management expenses because it is a discretionary expense. R&D does not directly generate revenue in the same way that production expenses do, so it can be trimmed when profits fall. Evidence suggests, however, that R&D enjoys some 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.

Many ways exist to measure R&D intensity; the one used most frequently is the ratio of company-funded R&D to net sales.[19] This statistic provides a way to gauge the relative importance of R&D across industries and among firms in the same industry. The industrial subsectors with the highest R&D intensities in 2001 were scientific R&D services (36.5 percent), software (19.3 percent), communications equipment (16.6 percent), and computer systems design and related services (16.5 percent). The R&D intensities of the professional, scientific, and technical services industries are particularly high because, as previously explained, much of the R&D reported by these companies also appears in their reported sales figures. Industries with the lowest R&D intensities (0.5 percent or less) were food, broadcasting and telecommunications, and utilities (table 4-6 text table). A decrease in the net sales of R&D-performing companies between 2000 and 2001 resulted in the ratio of R&D to sales for all industries increasing to 3.8 percent in 2001, up from 3.4 percent in 2000.

Sales are more skewed towards larger companies than R&D performance (table 4-6 text table). Smaller companies have much larger R&D-to-sales ratios than larger companies, reflecting that most startups and companies with less established revenue streams tend to be smaller. Large, well-established companies often have reserves of cash and other liquid assets that allow them to maintain their R&D activities amid short-term economic downturns. Less mature companies, however, tend to be more reliant on outside investment and thus their expenditures on R&D are more likely to be cut in the event of a contraction in the economy or capital markets. This is one explanation for the divergence in the R&D intensities of very small companies (less than 100 employees) and all other companies between 2000 and 2001.

R&D Expenses of Public U.S. Corporations

Most firms that make significant investments in R&D track their R&D expenses separately in their accounting records. (See sidebar, "R&D: Asset or Expense?") The annual reports of public U.S. corporations often include data on these R&D expenses.[20] In 2001 the 20 U.S. corporations with the largest reported R&D expenditures spent $67.9 billion on R&D. Ford Motor Company reported the most R&D ($7.4 billion), followed by General Motors Corporation ($6.2 billion) (table 4-7 text table). IT companies and pharmaceutical companies dominate the remainder of the list.

Corporate data tabulated by the U.S. Department of Commerce (DOC) reveal that the R&D spending of U.S.-headquartered corporations grew from $93.6 billion in 1994 to $164.5 billion in 2000, implying average annual real growth of 7.9 percent over the period (U.S. DOC/TA 2002). The largest and fastest growing R&D sectors during this period were the information and electronics manufacture and services sector, which spent $35.3 billion on R&D in 1994 and $77.7 billion in 2000, and the medical substances and devices sector, which spent $16.7 billion in 1994 and $32.5 billion in 2000 (appendix table 4-22 Microsoft Excel icon). Preliminary analysis of more recent company records indicates that the growth of U.S. corporate R&D slowed in 2001. (See sidebar, "Corporate R&D Strategies in an Uncertain Economy," for information on how some U.S.-based corporations intended to adjust their R&D policies in 2003.)

R&D Performance by State top of page

The latest data available on the state distribution of R&D performance are for 2000. Although R&D expenditures are concentrated in relatively few states, patterns of R&D activities vary considerably among the top R&D-performing locations. In 2000, total U.S. R&D expenditures were $265 billion, of which $247 billion could be attributed to expenditures within individual states, with the remainder falling under an undistributed "other/unknown" category[21] (appendix tables 4-23 Microsoft Excel icon and 4-24 Microsoft Excel icon). These totals include R&D performed by industry, universities, Federal agencies, and nonprofit organizations. (For a broader range of indicators of state-level S&E activities, see chapter 8.)

Distribution of R&D Expenditures Among States

In 2000 the 20 highest ranking states in R&D expenditures accounted for 87 percent of U.S. R&D expenditures, whereas the 20 lowest ranking states accounted for only 4 percent. The six states with the highest levels of R&D expenditures (in decreasing order of magnitude) were California, Michigan, New York, New Jersey, Massachusetts, and Illinois, and they accounted for half of the entire national effort. The top 10 states, which included Texas, Washington, Pennsylvania, and Maryland (ranked 7th, 8th, 9th, and 10th, respectively), accounted for two-thirds of U.S. R&D expenditures in 2000 (table 4-8 text table). California alone accounted for more than one-fifth of the $247 billion U.S. R&D total, exceeding the next highest state by nearly a factor of three.[22]

Ratio of R&D to Gross State Product

States vary significantly in the size of their economies because of differences in population, land area, infrastructure, natural resources, and history. Consequently, state variations in R&D expenditure levels may simply reflect differences in economic size or the nature of their R&D efforts. One way to control for the size of each state's economy is to measure each state's R&D level as a percentage of its gross state product (GSP).[23] Like the ratio of industrial R&D to net sales, the proportion of a state's GSP devoted to R&D is an indicator of R&D intensity. A list of states and corresponding R&D intensities can be found in appendix table 4-25 Microsoft Excel icon.

Sector Distribution of R&D Performance by State

Although leading states in total R&D tend to be well represented in each of the major R&D-performing sectors, the proportion of R&D performed in each of these sectors varies across states. States that are national leaders in total R&D performance are usually leaders in R&D performance by industrial sector, which is not surprising because industry-performed R&D accounts for 77 percent of the distributed U.S. total. Although university-performed R&D accounts for only 12 percent of the U.S. total, it also is highly correlated with the total R&D performance in a state.

Less overlap is reported between the top 10 states for total R&D and the top 10 states for federally performed R&D.[24] Only 4 states are in both top 10 lists: Maryland, California, Texas, and New Jersey. Maryland ranked first in Federal R&D performance, followed by the District of Columbia, California, and Virginia. The inclusion of Maryland, Virginia, and the District of Columbia in the top four ranking reflects the concentration of Federal facilities and administrative offices within the national capital area. Alabama, Florida, and New Mexico rank among the highest in Federal R&D because of their relatively high shares of Federal space- and defense-related R&D.

Industrial R&D in Top States

The types of companies that carry out R&D vary considerably among the 10 leading states in industry-performed R&D (table 4-9 text table). This reflects regional specialization or clusters of industrial activity. For example, in Michigan the transportation equipment industry accounted for 73 percent of industrial R&D in 2000, whereas it accounted for only 15 percent of the nation's total industrial R&D. Washington, having a high concentration of software R&D, has less of its industrial R&D concentrated in manufacturing industries than the nation as a whole. The computer and electronic products industry accounts for 24 percent of the nation's total industrial R&D but accounts for a larger share of the industrial R&D in California (36 percent), Massachusetts (44 percent), and Texas (42 percent). These three states have clearly defined regional centers of high-technology research and manufacturing: Silicon Valley in California, Route 128 in Massachusetts, and the Silicon Hills of Austin in Texas. In addition, New Jersey and Pennsylvania, both home to robust pharmaceutical and chemical manufacturing industries, show much higher concentrations of R&D in these industries than the nation as a whole. Of course other factors besides the location of industrial production also play a role in the location of industrial R&D activities. For example, industries tend to perform research near universities that conduct the same type of research, enabling them to benefit from local academic resources. (For more information, see "Technology Linkages: Contract R&D, Federal Technology Transfer, and R&D Collaboration.")


[1]  Expenditures for research and development performance are used as a proxy for actual R&D performance. In this chapter, the phrases R&D performance and expenditures for R&D performance are interchangeable.

[2]  At the time this report was written, estimated data for 2002 were the latest figures available for R&D expenditures.

[3]  The estimated U.S. gross domestic product (GDP) for 2000, 2001, and 2002 in constant 1996 dollars is $9,191 billion, $9,215 billion, and $9,440 billion, respectively. See appendix table 4-1 Microsoft Excel icon for a full time series.

[4]  Unless otherwise noted, whenever a sector is mentioned in this chapter, federally funded research and development centers (FFRDCs) are excluded. 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 university, or a nonprofit institution. 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 National Science Foundation (NSF) Survey of Industrial Research and Development before 2001 cannot be separated from the FFRDC component.

[5]  Recent methodological improvements have resulted in revisions from the amounts previously reported for total academic R&D expenditures. For more information, see M. Machen and B. Shackelford, Academic R&D Spending Maintains Growth From All Major Sources in FY 2001, NSF InfoBrief (forthcoming).

[6]  These findings are based on performer-reported R&D levels. In recent years, increasing differences have been detected in data on federally financed R&D as reported by Federal funding agencies and by performers of the work (most notably, industrial firms and universities). This divergence in R&D totals is discussed subsequently in this chapter. (See sidebar, "Tracking R&D: Gap Between Performer- and Source-Reported Expenditures.")

[7]  For most manufacturing industries, the U.S. Small Business Administration defines small firm as one with 500 or fewer employees. The share of company-financed R&D performed by these firms grew from 10 percent in 1990 to a peak of 20 percent in 1999.

[8]  Growth in the R&D/GDP ratio does not necessarily imply increased R&D expenditures. For example, the rise in R&D/GDP from 1978 to 1985 was due as much to a slowdown in GDP growth as it was to increased spending on R&D activities.

[9]  Non-Federal sources of R&D tracked by NSF include industrial firms, universities and colleges, nonprofit institutions, and state and local governments.

[10]  Recent methodological improvements in the estimation of total academic R&D have resulted in a break in the time series. Data for years before 1998 are slightly overstated compared with the data for later years. Had the same methodology been used for all years in the series, the average annual growth rate would have been closer to 4.3 percent per year in real terms from 1994 to 2000. See Machen and Shackelford (forthcoming) for details on the changes to methodology.

[11]  A newly developed product faces eventual obsolescence, whereas discoveries made through basic or applied research tend to be cumulative in nature and provide value for many years.

[12]  Beginning with the 2001 survey cycle, industry-administered FFRDCs were removed from the industrial R&D statistics. This resulted in a relative increase in the share of R&D performed by nonmanufacturing industries. In 2000, when these FFRDCs were included in the industrial R&D totals, R&D performed by nonmanufacturing industries accounted for 37.8 percent of total industrial R&D.

[13]  The trade and scientific R&D services industries are distinct entries in the NSF industrial R&D tables. Software and computer-related services, however, is the sum of three related entries: software, other information, and computer systems design and related services.

[14]  Details on how companies are assigned industry codes in the NSF Survey of Industrial Research and Development can be found on the NSF website ( National Science Foundation, Division of Science Resources Statistics, Survey of Industrial Research and Development, 2003. Available at

[15]  Although disclosure of Federal R&D funding prohibited the precise tabulation of total R&D performance for this industry, total R&D was between $24.5 billion and $24.6 billion.

[16]  The introduction of a more refined industry classification scheme in 1999 allowed more detailed reporting in nonmanufacturing industries. For the cited 2001 statistic, the R&D of companies in software, other information, and computer systems design and related services industries were combined. These three industries provided the closest approximation to the broader category cited for earlier years without exceeding the coverage of the broader category.

[17]  The 1997 data for this industry are bridged from a different industry classification scheme.

[18]  R&D performance is even more skewed towards companies with large R&D programs (total R&D of $100 million or more). The 243 firms in this category accounted for 73 percent of manufacturing R&D, 56 percent of nonmanufacturing R&D, and 67 percent of all industrial R&D in 2001.

[19]  A similar measure of R&D intensity is the ratio of R&D to value added (sales minus the cost of materials). Value added is often used in studies of productivity 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, R. Nelson, Modeling the connections in the cross section between technical progress and R&D intensity, RAND Journal of Economics 19(3) (Autumn 1988): 478–485.

[20]  This source of R&D data differs from the NSF Survey of Industrial Research and Development, so direct comparisons of these sources are not possible. See C. Shepherd and S. Payson, U.S. R&D Corporate R&D (Washington, DC: National Science Foundation, 2001) for an explanation of the differences between the two.

[21]  Approximately two-thirds of the R&D that could not be associated with a particular state was R&D performed by the nonprofit sector.

[22]  Reliability of the estimates of industrial R&D varies by state because the sample for the NSF Survey of Industrial Research and Development was not based on geography. Rankings do not take into account the margin of error of estimates from sample surveys. National Science Foundation, Division of Science Resources Statistics, Survey of Industrial Research and Development, 2003. Available at

[23]  Gross state product (GSP) is often considered the state counterpart of the nation's GDP. GSP is estimated by summing the value added of each industry in a state. Value added for an industry is equivalent to its gross output (sales or receipts and other operating income, commodity taxes, and inventory change) minus its intermediate inputs (consumption of goods and services purchased from other U.S. industries or imported). U.S. Bureau of Economic Analysis, Gross State Product: New Estimates for 2000 and Revised Estimates for 1998–1999 (Washington, DC, 2002). (See

[24]  Federally performed R&D includes costs associated with the administration of intramural and extramural programs by Federal personnel as well as actual intramural performance.

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