Chapter 4: Research and Development: Funds and Technology Linkages


National R&D Trends

U.S. R&D declined for the first time in almost 50 years in 2002 as a result of cutbacks in business R&D, but it has since recovered due to growth in all sectors of the economy.

  • U.S. R&D grew to $291.9 billion in 2003 after declining in 2002 for the first time since 1953. U.S. R&D is projected to increase further to $312.1 billion in 2004.
  • 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. The business sector is projected to have performed 70% of U.S. R&D in 2004.

The decades-long trend of federal R&D funding shrinking as a share of the nation's total R&D reversed after 2000.

  • The federal share of R&D funding first fell below 50% in 1979 and dropped to a low of 24.9% in 2000.
  • The federal share of R&D funding grew to a projected 29.9% in 2004 as private investment slowed and federal spending on R&D expanded, particularly in the areas of defense, health, and counterterrorism.

U.S. R&D is dominated by development, largely performed by the business sector, with most basic research conducted at universities and colleges.

  • In 2004 the United States performed an estimated $58.4 billion of basic research, $66.4 billion of applied research, and $187.3 billion of development.
  • Universities and colleges have historically been the largest performers of basic research in the United States, and in recent years they have accounted for over half (55% in 2004) of the nation's basic research. Most basic research is federally funded.
  • The development of new and improved goods, services, and processes is dominated by industry, which performed 90.2% of all U.S. development in 2004.

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Location of R&D Performance

R&D is geographically concentrated, and states vary significantly in terms of the types of research performed within their borders.

  • In 2003, the top 10 states in terms of R&D accounted for almost two-thirds of U.S. R&D. California alone accounted for more than one-fifth of the $278 billion of R&D that could be attributed to one of the 50 states or the District of Columbia.
  • Federal R&D accounts for 86% of all R&D in New Mexico, the location of the two largest federally funded research and development centers (FFRDCs) in terms of R&D performance, Los Alamos National Laboratory and Sandia National Laboratories.
  • Over half of all R&D performed in the United States by computer and electronic products manufacturers is located in California, Massachusetts, and Texas.
  • The R&D of chemicals manufacturing companies is particularly prominent in two states, accounting for 61% of New Jersey's and 49% of Pennsylvania's business R&D. Together these two states represent almost one-third of the nation's R&D in this sector.

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Business R&D

Business sector R&D is projected to have rebounded from its 2002 decline to a new high in 2004.

  • R&D performed by the business sector is estimated to have reached $219.2 billion in 2004.
  • The average R&D intensity of companies performing R&D in the United States peaked in 2001 at 3.8%, as R&D budgets remained steady despite a decline in sales of R&D-performing companies. R&D intensity declined to 3.2% in 2003 as a result of the 2002 decline in company R&D and stronger sales growth in 2003.
  • Computer and electronic products manufacturers and computer-related services companies, combined, performed over one-third of all company-funded research and development in 2003.

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Federal R&D

The current level of federal investment in R&D, both in absolute terms and as a share of the budget, is over an order of magnitude greater than what it was prior to World War II.

  • In the president's 2006 budget submission, the federal government is slated to set aside $132.3 billion for R&D, amounting to 13.6% of its discretionary budget.
  • Federal agencies are expected to obligate $106.5 billion for R&D support in FY 2005. The five largest R&D-funding agencies account for 94% of total federal R&D.

Defense-related R&D dominates the federal R&D portfolio.

  • The largest R&D budget function in the FY 2006 budget is defense, with a proposed budget authority of $74.8 billion, or 59% of the entire federal R&D budget.
  • In FY 2006, the Department of Defense (DOD) requested research, development, testing, and evaluation budgets in excess of $1 billion for four weapon systems.

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Federal R&E Tax Credit

From 1990 to 2001, research and experimentation (R&E) tax credit claims by companies in the United States grew twice as fast as industry-funded R&D, after adjusting for inflation, but growth in credit claims varied throughout the decade.

  • R&E tax credit claims reached an estimated $6.4 billion in 2001.
  • From 1990 to 1996, companies claimed between $1.5 billion and $2.5 billion in R&E credits annually; since then, annual R&E credits have exceeded $4 billion. However, in 2001 R&E tax credit claims still accounted for less than 4% of industry-funded R&D expenditures.

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Technology Linkages: Contract R&D, Public-Private Partnerships, and Industrial Alliances

Since 1993 R&D expenses paid to other domestic R&D performers outside their companies have increased as a proportion of company-funded R&D performed within firms.

  • In 2003, companies in the United States reported $10.2 billion in R&D expenses paid to other domestic R&D performers outside their companies, compared with $183.3 billion in company-funded R&D performed within firms. The ratio of contracted-out R&D to inhouse R&D was 5.6% for the aggregate of all industries in 2003, compared with 3.7% in 1993.

Participation by federal laboratories in cooperative research and development agreements (CRADAs) increased in FY 2003 but was still below the mid-1990s peak.

  • Federal laboratories participated in a total of 2,936 CRADAs with industrial companies and other organizations in FY 2003, up 4.3% from a year earlier, but still below the 3,500 peak in FY 1996.

U.S. companies continue to partner with other American and international companies worldwide to develop and exploit new technologies.

  • New industrial technology alliances worldwide reached an all-time peak in 2003 with 695 alliances, according to the Cooperative Agreements and Technology Indicators database. Alliances involving only U.S.-owned companies have represented the largest share of alliances in most years since 1980, followed by alliances between U.S. and European companies.

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International R&D

R&D is performed and funded primarily by a small number of developed nations.

  • In 2000, global R&D expenditures totaled at least $729 billion, half of which was accounted for by the two largest countries in terms of R&D performance, the United States and Japan.
  • The R&D performance of Organisation for Economic Co-operation and Development (OECD) countries grew to $652 billion in 2002. The G-7 countries (Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States) performed over 83% of OECD R&D in 2002.
  • More money was spent on R&D activities in the United States in 2002 than in the rest of the G-7 countries combined.

R&D intensity indicators, such as R&D/gross domestic product (GDP) ratios, also show the developed, wealthy economies well ahead of lesser-developed economies.

  • Overall, the United States ranked fifth among OECD countries in terms of reported R&D/GDP ratios. Israel (not an OECD member country), devoting 4.9% of its GDP to R&D, led all countries, followed by Sweden (4.3%), Finland (3.5%), Japan (3.1%), and Iceland (3.1%).
  • In the United States, the slowdown in GDP growth in 2001 preceded the decline of U.S. R&D in 2002. This resulted in U.S. R&D to GDP ratios of 2.7% in 2001 (a recent high) and 2.6% in 2002. Following the 2002 decline, R&D grew more rapidly than GDP in the United States, resulting in an R&D to GDP ratio of 2.7% in 2003.[1] The U.S. economy expanded at a faster pace in 2004, and R&D as a proportion of GDP remained at 2.7%.
  • Although China and Germany reported similar R&D expenditures in 2000, on a per capita basis, Germany's R&D was over 16 times that of China.

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R&D Investments by Multinational Corporations

U.S. multinational corporations (MNCs) continued to expand R&D activity overseas. However, the level of R&D expenditures by foreign MNCs in the United States has been even larger in recent years.

  • In 2002, R&D expenditures by affiliates of foreign companies in the United States reached $27.5 billion, up 2.3% from 2001 after adjusting for inflation. By comparison, total U.S. industrial R&D performance declined by 5.6%, after adjusting for inflation, over the same period. On the other hand, foreign affiliates of U.S. MNCs performed $21.2 billion in R&D expenditures abroad in 2002, up 5.6% from 2001, after adjusting for inflation.

Cross-country R&D investments through MNCs continue to be strong between U.S. and European companies. At the same time, certain developing or newly industrialized economies are emerging as significant hosts of U.S.-owned R&D, including China, Israel, and Singapore.

  • In 1994, major developed economies or regions accounted for 90% of overseas R&D expenditures by U.S. MNCs. This share decreased to 80% by 2001. The change reflects modest expenditures growth in European locations, compared with larger increases in Asia (outside Japan) and Israel.

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[1] 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.

National Science Board.