Print this chapter (2.2MB)
Businesses perform R&D with a variety of objectives in mind, but most business R&D is aimed at developing new and improved goods, services, and processes. For most firms, R&D is a discretionary expense similar to advertising. R&D does not directly generate revenue in the same way that production expenses do, so it can be trimmed with little impact on revenue in the short term. Firms attempt to invest in R&D at a level that maximizes future profits while maintaining current market share and increasing operating efficiency. R&D expenditures therefore indicate the level of effort dedicated to producing future products and process improvements in the business sector; by extension, they may reflect firms' perceptions of the market's demand for new and improved technology.
As previously mentioned, R&D performed by private industry is estimated to have reached $219.2 billion in 2004. The federal government funded 10.7% ($23.5 billion) of this total, and company funds and other private sources financed the remainder. These estimates are derived from the NSF and the U.S. Census Bureau's annual Survey of Industrial Research and Development, which collects financial data related to R&D activities from companies performing R&D in the United States. These data provide a basis for analyzing the technological dynamism of the business sector and are the official source for U.S. business R&D estimates (see sidebar "Industry Classification Complicates Analysis").
In addition to absolute levels of R&D expenditures, another key S&T indicator in the business sector is R&D intensity, a measure of R&D relative to production in a company, industry, or sector. Many ways exist to measure R&D intensity; the one used most frequently is the ratio of company-funded R&D to net sales. This statistic provides a way to gauge the relative importance of R&D across industries and among firms in the same industry. 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 strong sales growth in 2003.
Although all industries benefit from advances in S&T, industries perform different amounts of R&D. Some industries have relatively low R&D intensities (0.5% or less), such as the utilities industry and the finance, insurance, and real estate industries (appendix table
Computer and Electronic Products
The computer and electronic products manufacturing sector accounts for the largest amount of business R&D performed in the United States (table
In 2003, these industries performed at least $42.5 billion of R&D, or 21% of all business R&D. Companies and other nonfederal sources funded almost all of this R&D. The focus of the R&D in this sector is on development, with less than 16% of company-funded R&D devoted to basic and applied research. Two of the more R&D-intensive industries—communications equipment and semiconductor manufacturing—are included in this group. Both devoted more than 11% of sales to R&D in 2003.
The chemicals industry performed an estimated $32.5 billion of R&D in 2003. Like the computer and electronic products industries, very little of the R&D in the chemicals industry is federally funded. In terms of R&D performance, the largest industry within the chemicals subsector is pharmaceuticals and medicines. In 2003, pharmaceutical companies performed $25.4 billion of company-funded R&D, representing 79% of nonfederal R&D funding of the chemicals sector.
The Pharmaceutical Research and Manufacturers of America (PhRMA), an industry association that represents the government. In NSF's Survey of Industrial Research and Development, companies that predominantly license their the country's leading research-based pharmaceutical and biotechnology companies, annually surveys its members for information on their R&D investments. In 2003, PhRMA members reported investing $27.1 billion domestically in R&D, of which 38% was for basic and applied research (PhRMA 2005). Most of PhRMA members' domestic R&D investment supports continuing R&D on projects that originated in their own laboratories (73% in 2003), but 20% supports R&D on products licensed from other companies (notably biotechnology companies), universities, or technology rather than manufacture finished products are often classified in the scientific R&D services industry. Therefore, a sizeable amount of biotechnology R&D that serves the pharmaceutical industry is reported in the R&D services sector (see section "R&D Services").
Industries associated with software and computer-related services (such as data processing and systems design) performed approximately $26.1 billion of company-funded R&D in 2003. The R&D of these industries combined with that of the computer and electronic products manufacturers discussed earlier account for over one-third of all company-funded R&D in 2003. As computing and information technology became more integrated with every sector of the economy, 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% of all company-funded industrial R&D. In 2003 the company-funded R&D of a comparable group of industries (excluding engineering and architectural services) accounted for 14.3% of all company-funded industrial R&D (table
Aerospace and Defense Manufacturing
Although it is common to refer to the "defense industry," there is no such category in the industry classification system used by the federal government. Companies performing the majority of DOD's extramural R&D are classified in the aerospace products and parts industry; other transportation equipment industries; and the navigational, measuring, electro-medical, and control instruments manufacturing industry. In 2003 these industries reported performing $14.3 billion of federal R&D, accounting for 69% of all federal R&D expenditures reported by companies (table
Companies in the business of selling scientific and engineering R&D services to other companies or licensing the results of their R&D are generally classified in the architectural, engineering, and related services industry or the scientific R&D services industry. Companies in this sector perform the majority of the federal R&D that is not performed by aerospace and defense manufacturing firms, $3.8 billion in 2003. Despite the significant amount of government-sponsored R&D performed by this sector, R&D services companies increasingly rely on nonfederal sources of R&D financing. The R&D performed by companies in the R&D services sector and funded by company and other nonfederal sources has grown from $5.8 billion in 1997 to $13.8 billion in 2003, an increase of 138%. By comparison, the company-funded R&D of all other industries increased by 33% over the same period. Because much of the R&D reported by these companies also appears in their reported sales figures, the R&D intensity of the R&D services sector is particularly high (13% in 2003).
Although the companies in this sector and their R&D activities are classified as nonmanufacturing, many of the industries they serve are manufacturing industries. For example, many biotechnology companies in the R&D services sector license their technology to companies in the pharmaceutical manufacturing industry. If a research firm was a subsidiary of a manufacturing company rather than an independent contractor, its R&D would be classified as R&D in a manufacturing industry. Consequently, growth in R&D 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 the section entitled "Contract R&D Expenses.")
The sixth largest business sector in terms of R&D is automotive manufacturing. Companies in this industry reported performing $16.9 billion of company-funded R&D in 2003, accounting for 9% of all such R&D performed by businesses in the United States. At one time, this industry played a larger role in U.S. business R&D, accounting for as much as 16.2% of all company-funded and -performed R&D in 1959.
In 2003, 13 companies in the automotive manufacturing industry reported R&D expenditures over $100 million, representing approximately 85% of the industry's R&D. In most industries large companies perform more R&D than small companies, but in the automotive manufacturing industry the distribution of R&D is even more skewed towards large companies, with the R&D activities of the "Big Three" auto manufacturers (General Motors, Ford, and DaimlerChrysler) dominating the sector. In their annual reports to shareholders, these companies reported combined total engineering, research, and development expenses of $15.8 billion in FY 2003 (see sidebars "R&D Expenses of Public Corporations" and "Trends in R&D for Industrial Research Institute Members").
 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):478–85.
 Details on how companies are assigned industry codes in the NSF Survey of Industrial Research and Development can be found on the NSF website (http://www.nsf.gov/statistics/nsf02312/sectb.htm#frame). NSF, Division of Science Resources Statistics, Survey of Industrial Research and Development, 2003. Available at http://www.nsf.gov/ sbe/srs/indus/start.htm.
 Lower bound analyst estimates will be given in cases where disclosure of company-reported data or classification issues prevents the publication of total estimates from survey data.
 Methodological differences between the PhRMA Annual Membership Survey and the NSF Survey of Industrial Research and Development make it difficult to directly compare estimates from the two surveys. For example, the PhRMA survey definition of R&D includes Phase IV clinical trials whereas the NSF survey definition does not.
 Although disclosure of federal R&D funding prohibited the precise tabulation of total R&D performance for this industry, total R&D was at least $27.4 billion in 2003.
 The introduction of a more refined industry classification scheme in 1999 allowed more detailed reporting in nonmanufacturing industries. For the cited 2003 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.
 NAICS-based R&D estimates are only available back to 1997. Estimates for 1997 and 1998 were bridged from a different industry classification scheme. Total R&D for this sector has grown from $9.2 billion in 1997 to $17.6 billion in 2003.
 Company annual reports accessed 25 March 2005 at http://www.sec.gov/edgar.shtml. Because R&D expenses reported on financial documents differ from the data reported on the NSF Survey of Industrial Research and Development, 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.
 Microsoft Corporation, 2004 Microsoft Annual Report, Note 13.