Chapter 4: Research and Development: Funds and Technology Linkages

National R&D Trends

U.S. R&D grew to $291.9 billion in 2003 after declining in 2002 for the first time since 1953, when these data were first collected (see sidebar "Definitions of R&D").[2] The National Science Foundation (NSF) projects that U.S. R&D will continue to increase to $312.1 billion in 2004. As a point of reference, in 1990 total U.S. R&D was $152.0 billion—less than half the projected figure for 2004. After adjusting for inflation, total R&D declined 2.2% between 2001 and 2002, then increased 3.9% in 2003 and increased a projected 4.7% in 2004.[3] These recent growth rates in R&D exceed the average annual growth rate over the prior two decades, but they do not match the 6% per year inflation-adjusted growth of the late 1990s that resulted from substantial increases in company R&D, most notably in information and communications technology (ICT) industries and in small R&D-performing firms (figure 4-1 figure.).[4] These official U.S. R&D data are derived by adding up the R&D performance for all sectors of the economy for which it can be reasonably estimated. For a description of the R&D activity not captured in these data, see sidebar "Unmeasured R&D."

R&D Performance

The decline in 2002 and subsequent recovery of U.S. R&D can largely be attributed to the business sector, which performed 70% of U.S. R&D in 2004 (figure 4-2 figure.). The next largest sector in terms of R&D performance—universities and colleges—performs one-fifth the R&D of businesses. However, universities and colleges perform over half of the nation's basic research (table 4-1 table.) (see the discussion of R&D by character of work that appears later in this chapter). Federal agencies and all federally funded research and development centers (FFRDCs) combined performed 12% of U.S. total R&D in 2004.[5] Federal R&D is discussed in more detail later in this chapter.

From 2000 to 2004, U.S. R&D increased by 2% per year in real terms. 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. As a result, business R&D grew by only 0.3% per year in real terms between 2000 and 2004. During this period more robust growth was evident at federal agencies and FFRDCS, where R&D performance increased by 6.5% per year in real terms, and at universities and colleges, where R&D performance increased by 6.3% per year in real terms.[6]

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R&D Funding

Besides performing the majority of U.S. R&D, the business sector is also the largest source of R&D funding in the United States and provided 64% ($199 billion) of total R&D funding in 2004 (figure 4-2 figure.). Most businesses spend their R&D budgets on either internal R&D projects or for contract R&D performed by other businesses (see section on contract R&D). Only 1.7% of business R&D funding flows to other sectors. The federal government provided the second largest share of R&D funding, 30% ($93.4 billion). Unlike in the business sector, the majority of federal R&D dollars finance R&D in other sectors, with only 40.3% of these funds financing federal agencies and FFRDCs. The other sectors of the economy (e.g., state governments, universities and colleges, and nonprofit institutions) contributed the remaining 6% ($20 billion) (table 4-1 table.; see also sidebar "Alternative Methods for Stimulating R&D: Prizes as R&D Incentives").

Federal R&D Funding

The federal government was once the foremost sponsor of the nation's R&D, funding as much as 66.8% of all U.S. R&D in 1964 (figure 4-3 figure.). The federal share first fell below 50% in 1979 and dropped to a low of 24.9% in 2000. The declining share of federal R&D funding is most evident in the business sector. In the late 1950s and early 1960s over half of the nation's business R&D was funded by the federal government, but by 2000 less than 10% of business R&D was federally funded.[7] The decades-long trend of federal R&D funding shrinking as a share of the nation's total R&D reversed after 2000. As private investment slowed, federal spending on R&D expanded, particularly in the areas of defense, health, and counterterrorism. These changing conditions resulted in a growing federal share of R&D funding, projected at 29.9% in 2004.

Nonfederal R&D Funding

R&D funding from nonfederal sources is projected to have reached $218.7 billion in 2004. After adjusting for inflation, nonfederal R&D funding was only 0.7% higher in 2004 than in 2000. Business sector funding dominates non-federal R&D support. Of the total 2004 nonfederal R&D support, 91% ($199 billion) was company funded. The business sector's share of national R&D funding first surpassed the federal government's share in 1980. From 1980 to 1985, industrial support for R&D, in real dollars, grew at an average annual rate of 7.8%. This growth was maintained through both the mild 1980 recession and the more severe 1982 recession (figure 4-1 figure.). Between 1985 and 1994, growth in R&D funding from industry was slower, averaging only 3.1% per year in real terms, but from 1994 to 2000, industrial R&D support grew in real terms by 9.2% per year. This rapid growth rate came to a halt following the downturn in both the market valuation and economic demand for new technology in the first years of the 21st century. Between 2000 and 2002, industrial R&D support declined by 3.4% per year in real terms, but it subsequently grew at inflation-adjusted rates of 1.4% in 2003 and 4.5% in 2004.

Although R&D funding from other nonfederal sectors (namely, academic and other nonprofit institutions and state and local governments) is small in comparison to federal and business R&D spending, it has grown rapidly. In the 20 years between 1984 and 2004, funding from these sectors grew at an average annual rate of 6.4%, twice as fast as R&D funding from the federal and business sectors combined. Most of these funds went to research performed within the academic sector.

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R&D by Character of Work

Because R&D encompasses a broad range of activities, it is helpful to disaggregate R&D expenditures into the 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 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 (table 4-1 table.). As a share of all 2004 R&D expenditures, basic research represented 18.7%, applied research represented 21.3%, and development represented 60.0% (figure 4-4 figure.).

Basic Research

Universities and colleges have historically been the largest performer of basic research in the United States, and in recent years they have accounted for more than half (55% in 2004) of the nation's basic research (table 4-1 table.). Organizations influence the type of R&D conducted by their scientists and engineers both directly and indirectly. The most direct influence is the decision to fund specific R&D projects. This influence tends to be weaker in academia than in industry or government agencies because academic researchers generally have more freedom to seek outside R&D funding. This reliance on external sources of funding, along with the tenure system, makes universities and colleges well suited to carrying out basic research (particularly undirected basic research).

The federal government, estimated to have funded 61.8% of U.S. basic research in 2004, has historically been the primary source of support for basic research (figure 4-4 figure.). Moreover, the federal government funded 64.9% of the basic research performed by universities and colleges in 2004. Industry devoted only an estimated 4.8% of its total R&D support to basic research in that year (figure 4-5 figure.), representing 16% of the national total. The reasons for industry's relatively small contribution to basic research are that this activity generally involves a high degree of risk in terms of technical success and the potential commercial value of any discovery, as well as concern about the ability of the firm to enforce property rights over the discovery. However, firms may have other reasons for performing basic research in addition to immediate commercial demands. For example, a company that supports basic research could boost its human capital (by attracting and retaining academically motivated scientists and engineers) and strengthen its innovative capacity (i.e., its ability to absorb external scientific and technological knowledge). The industries that invest the most in basic research are those whose new products are most directly tied to recent advances in S&E, such as the pharmaceuticals industry and the scientific R&D services industry.

Applied Research

The business sector spends over three times as much on applied research than on basic research and accounts for about half of U.S. applied research funding. In 2004 the federal government invested $25.3 billion in applied research funding, 38.1% of the U.S. total. Whereas most of the federal investment in basic research supports work done at universities and colleges, the majority of federally funded applied research is performed by federal agencies and FFRDCs. Historically, the federal government's investment has emphasized basic research over applied research, reflecting the belief that the private sector is less likely to invest in basic research. In 2004, the federal government spent 43% more on basic research funding than on applied research funding (figure 4-5 figure.).

Within industry, applied research refines and adapts existing scientific knowledge and technology into knowledge and techniques useful for creating or improving products, processes, and 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 chemicals industry, the aerospace industry (largely financed by the Department of Defense [DOD]), and the R&D services industry (encompassing many biotechnology companies).


Development expenditures totaled an estimated $187.3 billion in 2004, 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 90.2% of all U.S. development in 2004. Universities, colleges, and other nonprofit institutions account for less than 2% of U.S. development performance. The balance of development is performed by federal agencies and FFRDCs, representing 8% of the U.S. total in 2004.

Industry and the federal government together funded 99% of all development in 2004, with industry providing 82% and the federal government providing 17%. Most federal development spending is defense related. The federal government generally invests in the development of such products as military aircraft and space exploration vehicles, for which it is the only consumer. Other typologies can be used to analyze R&D. One alternative is used in the federal budget as discussed in the section entitled "Federal S&T Budget" within "Federal R&D Funding by National Objective" appearing later in this chapter.

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[2] Expenditures R&D 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.

[3] See appendix table 4-1 Excel table. for the GDP implicit price deflators used to adjust expenditures to account for inflation.

[4] 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% in 1990 to a peak of 20% in 1999.

[5] 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 NSF Survey of Industrial Research and Development before 2001 cannot be separated from the FFRDC component.

[6] 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. See NSF/SRS (forthcoming) for details on the changes to methodology.

[7] 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 later in this chapter. (See sidebar, "Tracking R&D: Gap Between Performer- and Source-Reported Expenditures.")

National Science Board.