Chapter 4: Research and Development: Funds and Technology Linkages

International R&D Comparisons

Increasingly, the international competitiveness of a modern economy is defined by its ability to generate, absorb, and commercialize knowledge. Although it is no panacea, scientific and technological knowledge has proven valuable in addressing the challenges countries face in a variety of areas such as sustainable development, economic growth, health care, and agricultural production. Nations benefit from R&D performed abroad, but domestic R&D performance is an important indicator of a nation's innovative capacity and its prospects for future growth, productivity, and S&T competitiveness. This section compares international R&D spending patterns. Topics include absolute expenditure trends, measures of R&D intensity, the structure and focus of R&D performance and funding across sectors, and government research-related priorities and policies.

Most of the R&D data presented in this section are from the Organisation for Economic Co-operation and Development (OECD), the most reliable source for such international comparisons.[57] However, an increasing number of non-OECD countries and organizations now collect and publish R&D statistics, which are cited at various points in this section. No R&D-specific currency exchange rates exist, but for comparison purposes international R&D data have been converted to U.S. dollars with purchasing power parity (PPP) exchange rates (see sidebar "Comparing International R&D Expenditures").

Global R&D Expenditures

Worldwide R&D performance is concentrated in a few 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.[58] As figure 4-26 figure. illustrates, over 95% of global R&D is performed in North America, Asia, and Europe. Yet even within each of these regions, a small number of countries dominate R&D performance: the United States in North America; Japan and China in Asia; and Germany, France, and the United Kingdom in Europe.

Wealthy, well-developed nations, generally represented by OECD member countries, perform most of the world's R&D, but several lesser-developed nations now report higher R&D expenditures than most OECD members. In 2000, Brazil performed an estimated $13.6 billion of R&D, roughly half the amount performed in the United Kingdom (RICYT 2004). India performed an estimated $20.0 billion in 2000, making it the seventh largest country in terms of R&D in that year, ahead of South Korea (UNESCO/UIS 2005). China was the fourth largest country in 2000 in terms of R&D performance, with $48.9 billion of R&D, only slightly less than the $50.9 billion of R&D performed in Germany (OECD 2004). In 2002, an estimated $72.0 billion of R&D was performed in China, making it the third largest country in terms of R&D performance. Given the lack of either R&D-specific exchange rates (see sidebar "Comparing International R&D Expenditures") or accepted qualitative measures of international R&D (see sidebar "Qualitative Comparisons of International R&D"), it is difficult to draw conclusions from these absolute R&D figures.

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OECD and G-7 R&D Expenditures

The 30 OECD countries represented 82% of global R&D, or $602 billion, in 2000. Although global R&D estimates are not available for later years, the R&D performance of 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. The three largest R&D performers, the United States, Japan, and Germany, account for over two-thirds of the OECD's R&D. The United States accounts for 43% of OECD R&D, a slight drop in share from 2000 when it performed 44% of all OECD R&D. Outside of the G-7 countries, South Korea is the only country that accounted for a substantial share of the OECD total (3.5% in 2002, up from 3.1% in 2000).

More money was spent on R&D activities in the United States in 2002 than in the rest of the G-7 countries combined (figure 4-27 figure.).[59] In terms of relative shares, U.S. R&D expenditures in 1984 reached historical highs of 55% of the G-7 total and 47% of the OECD total. As a proportion of the G-7 total, U.S. R&D expenditures declined steadily to a low of 48% in 1990. After the early 1990s, the U.S. percentage of total G-7 R&D expenditures grew as a result of a worldwide slowing in R&D performance that was more pronounced in other countries. Although U.S. R&D spending idled or declined for several years in the early to mid-1990s, the reduction in real R&D spending in most of the other G-7 countries was more striking. In Japan, Germany, and Italy, inflation-adjusted R&D spending fell for 3 consecutive years (1992, 1993, and 1994) (OECD 2004).[60] R&D spending rebounded in the late 1990s in several G-7 countries, but the recovery was most robust in the United States. By 2000, the U.S. share of total G-7 R&D had grown to 52%. The subsequent slowdown in the technology market in 2001 and 2002 has had a global reach, but its impact on R&D was more pronounced in the United States than in the other G-7 countries, resulting in a decline in the U.S. share of G-7 R&D in 2001 and 2002.

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Indicators of R&D Intensity

International comparisons of absolute R&D expenditures are complicated by the fact that countries vary widely in terms of the sizes of their population and economy. For example, although Germany and China had roughly equivalent R&D expenditures in 2000, China's population was over 15 times as large and its economy was over twice as large as Germany's in that year. Policymakers commonly use various measures of R&D intensity to account for these size differences when making international comparisons.

One of the first and now one of the more widely used indicators of a country's R&D intensity is the ratio of R&D spending to GDP, the main measure of a nation's total economic activity (Steelman 1947). Policymakers often use this ratio for international benchmarking and goal setting (see sidebar "European Union Strategy for R&D and Economic Competitiveness").

Normalized indicators, such as R&D/GDP ratios, are useful for international comparisons because they both account for size differences between countries and obviate the need for exchange rates. However, even normalized indicators are not always comparable from one country to another. This occurs most often when the variable being used to normalize the indicator differs across countries. For example, the structure of national economies, and hence GDP, varies greatly. As figure 4-28 figure. shows, the agricultural and industrial sectors account for less than one-third of GDP in the United States and the other G-7 countries (Canada, France, Germany, Italy, Japan, and the United Kingdom). These sectors represent similarly small shares of the labor force. In less-developed nations, such as India and China, the agricultural and industrial sectors account for more than half of GDP and an even larger share of the labor force (estimated to be 72% in China and 77% in India) (CIA 2005). Structural differences such as this can result in significant country-to-country variation in terms of R&D indicators. For several years, economists have debated whether or not R&D should be included as part of the national accounts (see sidebar "Indicators Development on R&D Within the National Accounts: The BEA/NSF R&D Satellite Account Project").

Total R&D/GDP Ratios

The ratio of R&D expenditures to GDP is a useful indicator of the intensity of R&D activity in relation to other economic activity and can be used to gauge a nation's commitment to R&D at different points in time. In the United States, the slow-down 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 (figure 4-29 figure.). 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.[61] The U.S. economy expanded at a faster pace in 2004, and R&D as a proportion of GDP remained at 2.7%.[62]

Since 1953, U.S. R&D expenditures as a percentage of GDP have ranged from a minimum of 1.4% (in 1953) to a maximum of 2.9% (in 1964). Most of the growth over time in the R&D/GDP ratio can be attributed to steady increases in nonfederal R&D spending.[63] Nonfederally financed R&D, the majority of which is company financed, increased from 0.6% of GDP in 1953 to an estimated 1.9% of GDP in 2004 (down from a high of 2.1% of GDP in 2000). The increase in nonfederally financed R&D as a percentage of GDP illustrated in figure 4-29 figure. is indicative of the growing role of S&T in the U.S. economy.

Historically, most of the peaks and valleys in the U.S. 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 nonfederal sources of R&D spending generally kept pace with or exceeded GDP growth. Since 2000, defense-related R&D spending has surged, and federal R&D spending growth has outpaced GDP growth. (See the discussion of defense-related R&D earlier in this chapter.)

For many of the G-8 countries (i.e., the G-7 countries plus Russia), the latest R&D/GDP ratio is no higher now than it was at the start of the 1990s, which ushered in a period of slow growth or decline in their overall R&D efforts (figure 4-30 figure.). The two exceptions, Japan and Canada, both exhibit substantial increases on this indicator between 1990 and 2002. In Japan this indicator declined in the early 1990s as a result of reduced or level R&D spending by industry and government, a pattern similar to that exhibited by the United States. Japan's R&D/GDP ratio subsequently rose to 3.1% in 2002, the result of a resurgence of industrial R&D in the mid-1990s coupled with anemic economic conditions. In the 5 years between 1997 and 2002, real GDP in Japan grew only 1.8%, so relatively small increases in R&D expenditures resulted in a rise in its R&D/GDP ratio.[64] By contrast, over the same period real GDP grew 21.8% in Canada; hence, the rise in its R&D/GDP ratio is more indicative of robust R&D growth.

Geopolitical events also affect R&D intensity indicators as evidenced by Germany and Russia. Germany's R&D/GDP ratio fell from 2.8% at the end of the 1980s, before reunification, to 2.2% in 1994. Its R&D/GDP has since risen to 2.5% in 2003. The end of the Cold War and collapse of the Soviet Union had a drastic effect on Russia's R&D intensity. R&D performance in Russia was estimated at 2.0% of GDP in 1990; that figure dropped to 1.4% in 1991 and then dropped further to 0.7% in 1992. The severity of this decline is compounded by the fact that Russian GDP contracted in each of these years. Both Russia's R&D and GDP exhibited strong growth after 1998. In the 5 years between 1998 and 2003, Russia's R&D doubled and its R&D/GDP ratio rose from 1.0% to 1.3%.

Overall, the United States ranked fifth among OECD countries in terms of reported R&D/GDP ratios (table 4-13 table.), but several of its states have R&D intensities over 4%. Massachusetts, a state with an economy larger than Sweden's and twice that of Israel's, has reported an R&D intensity at or above 5% since 2001 (see the section entitled "Location of R&D Performance"). Israel (not an OECD member country), devoting 4.9% of its GDP to R&D, currently leads all countries, followed by Sweden (4.3%), Finland (3.5%), Japan (3.1%), and Iceland (3.1%). In general, nations in Southern and Eastern Europe tend to have R&D/GDP ratios of 1.5% or lower, whereas Nordic nations and those in Western Europe report R&D spending shares greater than 1.5%. This pattern broadly reflects the wealth and level of economic development for these regions. A strong link exists between countries with high incomes that emphasize the production of high-technology goods and services and those that invest heavily in R&D activities (OECD 2000).[65] The private sector in low-income countries often has a low concentration of high-technology industries, resulting in low overall R&D spending and therefore low R&D/GDP ratios. Because of the business sector's dominant role in global R&D funding and performance, R&D/GDP ratios are most useful when comparing countries with national S&T systems of comparable maturity and development.

Outside the European region, R&D spending has intensified considerably since the early 1990s. Several Asian countries, most notably South Korea and China, have been particularly aggressive in expanding their support for R&D and S&T-based development. In Latin America and the Pacific region, other non-OECD countries also have attempted to increase R&D investments substantially during the past several years. Even with recent gains, however, most non-European (non-OECD) countries invest a smaller share of their economic output in R&D than do OECD members (with the exception of Israel). All Latin American countries for which such data are available report R&D/GDP ratios at or below 1% (table 4-13 table.). This distribution is consistent with broader indicators of economic growth and wealth.

Nondefense R&D Expenditures and R&D/GDP Ratios

Another indicator of R&D intensity, the ratio of non-defense R&D to GDP, is useful when comparing nations with different financial investments in national defense. Although defense-related R&D does result in spillovers that produce social benefits, nondefense R&D is more directly oriented toward national scientific progress, standard-of-living improvements, economic competitiveness, and commercialization of research results. Using this indicator, the relative position of the United States falls below that of Germany and just above France among the G-7 nations (figure 4-30 figure.). This is because the United States devotes more of its R&D to defense-related activities than most other countries. In 2002 approximately 16% of U.S. R&D was defense related, whereas less then 1% of the R&D performed in Germany and Japan was defense related. Both of these countries rely heavily on international alliances for national defense. Approximately 10% of the United Kingdom's total R&D was defense related in 2002.

Since the end of the Cold War, the relative share of defense-related R&D has diminished markedly in several countries. Between 1988 and 2002, the defense share of R&D fell from 31% to 16% in the United States and from 19% to 8% in France. Between 1989 and 2002, the defense share of R&D fell from 23% to 10% in the United Kingdom. The defense-related share of R&D is higher in Russia (30% in 2002), where, unlike in the G-7 countries, the government funds the majority of national R&D (see the section entitled "International R&D by Performer and Source of Funds").

Basic Research/GDP Ratios

R&D involves a wide range of activities, ranging from basic research to the development of marketable goods and services. Basic research generally has low short-term returns, but it builds intellectual capital and lays the groundwork for future advances in S&T. The relative investment in basic research as a share of GDP therefore indicates differences in national priorities, traditions, and incentive structures with respect to S&T. Estimates of basic research often involve a greater element of subjective assessment than other R&D indicators; thus, only half of the OECD member countries report these data at the national level. Nonetheless, where these data exist, they help differentiate the national innovation systems of different countries in terms of how their R&D resources contribute to advancing scientific knowledge and developing new technologies.

High basic research/GDP ratios generally reflect the presence of robust academic research centers in the country and/or a concentration of high-technology industries (such as biotechnology) with patterns of strong investment in basic research (see "International R&D by Performer and Source of Funds"). Of the OECD countries for which data are available, Switzerland has the highest basic research/GDP ratio at 0.7% (figure 4-31 figure.). This is significantly higher than either the U.S. ratio of 0.5% or the Japanese ratio of 0.4%. Switzerland, a small high-income country boasting the highest number of Nobel prizes, patents, and science citations per capita worldwide, devoted more than 60% of its R&D to basic and applied research in 2000 despite having an industrial R&D share (74%) comparable to the United States and Japan. The differences among the Swiss, U.S., and Japanese character-of-work shares reflect both the high concentration of chemical and pharmaceutical R&D in Swiss industrial R&D as well as the "niche strategy" of focusing on specialty products adopted by many Swiss high-technology industries.

China , despite its growing investment in R&D, reports among the lowest basic research/GDP ratios (0.07%), below Argentina (0.10%) and Mexico (0.12%) (figure 4-32 figure.). With its emphasis on applied research and development aimed at short-term economic development, China follows the pattern set by Taiwan, Singapore, South Korea, and Japan. In each of these countries or economies, basic research accounts for 15% or less of total R&D.

R&D per Capita

Although R&D as a percentage of GDP is the most commonly used indicator for international comparisons of S&T, regional differences in R&D intensity are even more pronounced using the indicator of R&D expenditures per capita (figure 4-33 figure.). Although China and Germany reported similar R&D expenditures in 2000, on a per capita basis Germany's R&D was over 16 times China's. Because the salaries of scientists and engineers are a large component of R&D expenditures, high R&D per capita is proportionate both to the relative number of researchers working in a country as well as the wages these researchers are earning. Regions with a concentration of wealthy countries, such as North America and Europe, far outstrip lesser-developed regions such as Africa and South America on both of these measures.

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International R&D by Performer and Source of Funds

R&D performance patterns by sector are broadly similar across countries, but national sources of support differ considerably. In each of the G-8 countries the industrial sector is the largest performer of R&D (figure 4-34 figure.). Industry's share of R&D performance ranged from 49% in Italy to over 73% in Japan and South Korea; it was 69% in the United States. In most countries industrial R&D is financed primarily by the business sector. A notable exception is the Russian Federation, where government was the largest source of industrial R&D funding in 2001 (NSB 2004).

In all of the G-8 countries except Russia, the academic sector was the second largest R&D performer (representing from 15% to 35% of R&D performance in each country). In Russia, government is the second largest R&D performer, accounting for 25% of its R&D performance in 2003. Government-performed R&D is even more prominent in China, where it accounted for an estimated 30% of Chinese R&D performance in 2002.

Government and industry together account for over three-quarters of the R&D funding in each of the G-8 countries, although their respective contributions vary (figure 4-35 figure.).[66] Among these countries the industrial sector provided as much as 73% of R&D funding in Japan to as little as 31% in Russia. Government provided the largest share of Russia's R&D (60%), as it has in Italy in past years (more than 50% in 1999). In the remaining six G-8 member nations, government was the second largest source of R&D funding, ranging from 19% of total R&D funding in Japan to 37% in France.

In nearly all OECD countries, the government's share of total R&D funding has declined over the past two decades, as the role of the private sector in R&D grew considerably (figure 4-36 figure.). In 2002, 30% of all R&D funds were derived from government sources, down from 44% in 1981.[67] The relative decline of government R&D funding is the result of budgetary constraints, economic pressures, and changing priorities in government funding (especially the relative reduction in defense R&D in several of the major R&D-performing countries, notably France, the United Kingdom, and the United States). This trend also reflects the absolute growth in industrial R&D funding, irrespective of government R&D spending patterns.

Canada and the United Kingdom both report relatively large amounts of R&D funding from abroad (12% and 18%, respectively), much of which originates from foreign business enterprises (figure 4-35 figure.). Businesses in the United States also receive foreign R&D funding; however, these data are not separately reported in U.S. R&D statistics and are included in the figures reported for industry. Therefore the industry share of R&D funding for the United States is overstated compared with the industry shares for countries where foreign sources of R&D funding are reported separately from domestic sources (see "Industrial Sector"). In the United States companies include foreign sources of R&D funding in the category "company and other nonfederal sources" when responding to the U.S. Survey of Industrial R&D.

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Industrial Sector

The structure of industrial R&D varies substantially among countries in terms of both sector concentration and sources of funding. Because industrial firms account for the largest share of total R&D performance in each of the G-8 countries and most OECD countries, differences in industrial structure can help explain international differences in more aggregated statistics such as R&D/GDP. For example, countries with higher concentrations of R&D-intensive industries (such as communications equipment manufacturing) are likely to also have higher R&D/GDP ratios than countries whose industrial structures are weighted more heavily toward less R&D-intensive industries.

Sector Focus

Using internationally comparable data, in 2002 no one industry accounted for more than 11% of total business R&D in the United States (figure 4-37 figure.; appendix table 4-58 Excel table.). This is largely a result of the size of business R&D expenditures in the United States, which makes it difficult for any one sector to dominate. However, the diversity of R&D investment by industry in the United States is also an indicator of how the nation's accumulated stock of knowledge and well-developed S&T infrastructure have made it a popular location for R&D performance in a broad range of industries.

Compared with the United States, many of the other countries shown in figure 4-37 figure. display much higher industry and sector concentrations. In countries with less business R&D, high sector concentrations can result from the activities of one or two large companies. This pattern is notable in Finland, where the radio, television, and communications equipment industry accounted for almost half of business R&D in 2002. This high concentration likely reflects the activities of one company, Nokia, the world's largest manufacturer of cellular phones (see also table 4-6 table. in sidebar "R&D Expenses of Public Corporations"). By contrast, South Korea's high concentration (46% of business R&D in 2003) of R&D in this industry is not the result of any one or two companies, but reflects the structure of its export-oriented economy. South Korea is one of the world's top producers of electronic goods, and its top two export commodities are semiconductors and cellular phones (see sidebar "R&D in the ICT Sector").

Other industries also exhibit relatively high concentrations of R&D by country. Automotive manufacturers rank among the largest R&D-performing companies in the world (see sidebar "R&D Expenses of Public Corporations"). Because of this, the countries that are home to the world's major automakers also boast the highest concentration of R&D in the motor vehicles industry. This industry accounts for 29% of Germany's business R&D, 27% of the Czech Republic's, and 19% of Sweden's, reflecting the operations of automakers such as DaimlerChrysler and Volkswagen in Germany, Skoda in the Czech Republic, and Volvo and Saab in Sweden. Japan, France, South Korea, and Italy are also home to large R&D-performing firms in this industry.

The pharmaceuticals industry is less geographically concentrated than the automotive industry, but is still prominent in several countries. The pharmaceuticals industry accounts for over 20% of business R&D in the United Kingdom, Belgium, and Denmark. The United Kingdom is the largest performer of pharmaceutical R&D in Europe and is home to GlaxoSmithKline, the second largest pharmaceutical company in the world in terms of R&D expenses in 2002 and 2003 (table 4-6 table.).

The office, accounting, and computing machinery industry represents only a small share of business R&D in most countries, with the United States and Japan accounting for over 90% of this industry's R&D among OECD countries (appendix table 4-58 Excel table.). Only the Netherlands reports a high concentration of business R&D in this industry (27% in 2002), most likely representing the activities of Royal Philips Electronics, the largest electronics company in Europe.

One of the more significant trends in both U.S. and international industrial R&D activity has been the growth of R&D in the service sector. In the European Union (EU), service-sector R&D has grown from representing 8% of business R&D in 1992 to 15% in 2002 (figure 4-40 figure.). In 2002, the EU's service-sector R&D nearly equaled that of its motor vehicles industry and more than doubled that of its aerospace industry. According to national statistics for recent years, the service sector accounted for less than 10% of total industrial R&D performance in only three of the countries shown in figure 4-37 figure. (Germany, South Korea, and Japan). Among the countries listed in figure 4-37 figure., the service sector accounted for as little as 7% of business R&D in Japan to as much as 42% in Australia, and it accounted for 27% of total business R&D in the United States.[68] Information and communications technologies (ICT) services account for a substantial share of the service R&D totals (see sidebar "R&D in the ICT Sector").

Sources of Industrial R&D Funding

Most of the funding for industrial R&D in each of the G-8 countries is provided by the business sector. In most OECD countries government financing accounts for a small and declining share of total industrial R&D performance (figure 4-41 figure.). In 1981, government provided 22% of the funds used by industry in conducting R&D within OECD countries, whereas, by 2002, government's funding share of industrial R&D had fallen to 7%. Among G-7 countries, government financing shares ranged from as little as 1% of industrial R&D performance in Japan in 2002 to 14% in Italy in 2003 (appendix table 4-44 Excel table.). In the United States in 2003, the federal government provided about 10% of the R&D funds used by industry, and the majority of that funding was obtained through DOD contracts.

Foreign sources of funding for business R&D increased in many countries between 1981 and 2003 (figure 4-42 figure.). The role of foreign funding varied from country to country, accounting for less than 1% of industrial R&D in Japan to as much as 29% in Canada in 2000. This foreign funding predominantly came from foreign corporations but also included funding from foreign governments and other foreign organizations. The growth of this funding primarily reflects the increasing globalization of industrial R&D activities. For European countries, however, the growth in foreign sources of R&D funds may also reflect the expansion of coordinated European Community efforts to foster cooperative research through its European Framework Programmes.[69] Although the pattern of foreign funding has seldom been smooth over time, it accounted for more than 20% of industry's domestic performance totals in Canada from 1996 to 2003 and in the United Kingdom from 1998 to 2002. Foreign funding as a share of Russian industrial R&D grew rapidly from 2% in 1994 to 20% in 1999, but it has since fallen to 10% in 2003. There are no data on foreign funding sources of U.S. R&D performance. However, the importance of international investment for U.S. R&D is highlighted by the fact that approximately 14% of funds spent on industrial R&D performance in 2002 were estimated to have come from majority-owned affiliates of foreign firms investing domestically (see figure 4-46 figure. in "R&D Investments by Multinational Corporations").

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Academic Sector

In many OECD countries, the academic sector is a distant second to industry in terms of national R&D performance. Among G-8 countries, universities accounted for as little as 6% of total R&D in Russia to as much as 35% in Canada; they accounted for 17% of U.S. total R&D (figure 4-43 figure.).[70] The academic sector plays a relatively small role in the national R&D of the largest Asian R&D-performing countries, accounting for 14% or less of R&D in Japan, China, South Korea, and Taiwan. Each of these countries also reports relatively low amounts of basic research as a share of total R&D (figure 4-32 figure.). The relative size of the academic sector's R&D in a country tends to correlate with the basic research share reported by that country because academic R&D is usually more focused on basic research than industry R&D.

Source of Funds

For most countries, the government is now, and historically has been, the largest source of academic research funding (see sidebar "Government Funding Mechanisms for Academic Research"). However, in each of the G-7 countries for which historical data exist, the government's share has declined since 1981, and industry's share has increased. This trend has been most evident in Germany, where the industry-funded share of academic R&D is twice that of all OECD members combined, and in Canada (figure 4-44 figure.). Industry's share of academic R&D funding is greatest in Russia (28% in 2003) and China (32% in 2000).

S&E Fields

Most countries supporting a substantial level of academic R&D (at least $1 billion PPPs in 1999) devote a larger proportion of their R&D to engineering and social sciences than does the United States (table 4-14 table.). Conversely, the U.S. academic R&D effort emphasizes the medical sciences and natural sciences relatively more than do many other OECD countries.[71] The latter observation is consistent with the emphases in health and biomedical sciences for which the United States (and in particular NIH and U.S. pharmaceutical companies) is known.

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Government R&D Priorities

Analyzing public expenditures for R&D by major socio-economic objectives shows how government priorities differ considerably across countries and change over time.[72] Within the OECD, the defense share of governments' R&D financing declined from 43% in 1986 to 29% in 2001 (table 4-15 table.). Much of this decline was driven by the United States, where the defense share of the government's R&D budget dropped from 69% in 1986 to 50% in 2001. The defense share of the U.S. government's R&D budget is projected to have grown to 57% in 2005 ($75 billion).

Notable shifts also occurred in the composition of OECD countries' governmental nondefense R&D support over the past two decades. In terms of broad socioeconomic objectives, government R&D shares increased most for health and the environment.[73] Growth in health-related R&D financing was particularly strong in the United States, whereas many of the other OECD countries reported relatively higher growth in environmental research programs. In 2001 the U.S. government devoted 24% of its R&D budget to health-related R&D, making such activities second in magnitude only to defense. Conversely, the relative share of government R&D support for economic development programs declined considerably in the OECD, from 38% in 1981 to 22% in 2001. Economic development programs include the promotion of agriculture, fisheries and forestry, industry, infrastructure, and energy, all activities for which privately financed R&D is more likely to be provided without public support.

Differing R&D activities are emphasized in each country's governmental R&D support statistics (figure 4-45 figure.). As noted above, defense accounts for a relatively smaller government R&D share in most countries than in the United States. In recent years, the defense share was relatively high in Russia, the United Kingdom, and France at 44%, 34%, and 23%, respectively, but was 6% or less in Germany, Italy, Canada, and Japan. In 2004, South Korea expended 13% of its government R&D budget on defense-related activities.

Japan committed 17% of its governmental R&D support to energy-related activities, reflecting the country's historical concern over its high dependence on foreign sources of energy. Canada, Russia, and South Korea all allocate two to three times as much of their R&D budgets to agriculture than the other countries in figure 4-45 figure.. Space R&D is emphasized most in France and Russia (8% and 10%, respectively), whereas industrial production R&D accounted for 10% or more of governmental R&D funding in Canada, Germany, Italy, Russia, and South Korea. Industrial production and technology is the leading socioeconomic objective for R&D in South Korea, accounting for 27% of all government R&D. This funding is primarily oriented toward the development of science-intensive industries and is aimed at increasing economic efficiency and technological development.[74] Industrial technology programs accounted for less than 1% of the U.S. total. This figure, which includes mostly R&D funding by NIST, is understated relative to most other countries as a result of data compilation differences. In part, the low U.S. industrial development share reflects the expectation that firms will finance industrial R&D activities with their own funds; in part, government R&D that may be indirectly useful to industry is often funded with other purposes in mind such as defense and space (and is therefore classified under other socioeconomic objectives).

Compared with other countries, France and South Korea invested relatively heavily in nonoriented research at 22% of government R&D appropriations. The U.S. government invested 6% of its R&D budget in nonoriented research, largely through the activities of NSF and DOE.

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[57] OECD maintains R&D expenditure data that can be categorized into three periods: (1) 1981 to the present (data are properly annotated and of good quality); (2) 1973 to 1980 (data are probably of reasonable quality, and some metadata are available); and (3) 1963 to 1972 (data are questionable for most OECD countries [with notable exceptions of the United States and Japan], many of which launched their first serious R&D surveys in the mid-1960s). The analyses in this chapter are limited to data for 1981 and subsequent years. The 30 current members of the OECD are Australia, Austria, Belgium, Canada, Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Japan, Korea, Luxembourg, Mexico, Netherlands, New Zealand, Norway, Poland, Portugal, Slovak Republic, Spain, Sweden, Switzerland, Turkey, United Kingdom, and United States.

[58] The global R&D figure is estimated based on data for 80 countries compiled from three sources. Estimates for 31 countries were taken from OECD data, estimates for 18 additional countries were taken from RICYT data, and estimates for the remaining 25 countries were taken from UNESCO reports.

[59] Because U.S. universities generally do not maintain data on departmental research, U.S. totals are understated relative to the R&D effort reported for other countries. The national totals for Europe, Canada, and Japan include the research component of GUF block grants provided by all levels of government to the academic sector. These funds can support departmental R&D programs that are not separately budgeted. The U.S. federal government does not provide research support through a GUF equivalent, preferring instead to support specific, separately budgeted R&D projects. However, a fair amount of state government funding probably does support departmental research at public universities in the United States. See sidebar, "Government Funding Mechanisms for Academic Research."

[60] The United Kingdom similarly experienced 3 years of declining real R&D expenditures, but its slump took place in 1995, 1996, and 1997. The falling R&D totals in Germany were partly a result of specific and intentional policies to eliminate redundant and inefficient R&D activities and to integrate the R&D efforts of the former East Germany and West Germany into a united German system.

[61] 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.

[62] A significant contributor to GDP growth in 2003 and 2004 was increased private domestic investment in information processing equipment and software. Because increased demand for high-technology goods and services is an incentive for increased R&D expenditures, this component of GDP is a useful indicator of private R&D expenditures by information technology businesses.

[63] Nonfederal sources of R&D tracked by NSF include industrial firms, universities and colleges, nonprofit institutions, and state and local governments.

[64] In Japan, real GDP declined in both 1998 and 2002.

[65] See OECD (1999) for further discussion of these and other broad R&D indicators.

[66] In accordance with international standards, the following sectors are recognized sources of funding: all levels of government combined, business enterprises, higher education, private nonprofit organizations, and funds from abroad. Italy's distribution of R&D by source of funds was not available for 2000. In earlier years, government sources accounted for more than half of Italy's R&D, industry accounted for more than 40%, and foreign sources funded the remainder.

[67] Among all OECD countries, in 2002 the government sector accounted for the highest funding share in Poland (61%) and the lowest share in Japan (18%).

[68] Some of the R&D reported in the trade industry for the United States was redistributed for this analysis.

[69] Since the mid-1980s, European Community (EC) funding of R&D has become increasingly concentrated in its multinational Framework Programmes for Research and Technological Development (RTD), which were intended to strengthen the scientific and technological bases of community industry and to encourage it to become more internationally competitive. EC funds distributed to member countries' firms and universities have grown considerably. The EC budget for RTD activities has grown steadily from 3.7 billion European Currency Units (ECU) in the First Framework Programme (1984–87) to 17.5 billion ECU for the Sixth Framework Programme (2003–06). The institutional recipients of these funds tend to report the source as "foreign" or "funds from abroad." Eurostat. 2001. Statistics on Science and Technology in Europe: Data 1985–99. Luxembourg : European Communities.

[70] OECD data for the U.S. academic sector includes the R&D of university-administered FFRDCs. These FFRDCs performed an estimated $7.3 billion of R&D in 2003.

[71] In international S&E field compilations, the natural sciences comprise math and computer sciences, physical sciences, environmental sciences, and all life sciences other than medical and agricultural sciences.

[72] Data on the socioeconomic objectives of R&D funding are generally derived from national budgets. Because budgets each have their own distinct methodology and terminology, these R&D funding data may not be as comparable as other types of international R&D data.

[73] Health and environment programs include human health, social structures and relationships, control and care of the environment, and exploration and exploitation of the Earth.

[74] Historically, Russia has also devoted a large share of government R&D to industrial development. Fully 27% of the government's 1998 R&D budget appropriations for economic programs were used to assist in the conversion of the country's defense industry to civil applications (American Association for the Advancement of Science and Centre for Science Research and Statistics, 2001).

National Science Board.