Business R&D

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. 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.

R&D performed by the business sector reached $226 billion in 2005. The federal government funded 9.7% ($22 billion) of this total, and company funds and other private sources financed the remainder (appendix tables 4-19, 4-20, and 4-21Excel.). These estimates are derived from the NSF-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 R&D investment of the business sector and are the official source for U.S. business R&D estimates (see sidebar, "Industry Classification").

In addition to absolute levels of R&D expenditures, another key company 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, including the ratio of R&D to GDP discussed earlier. The measure used most frequently is the ratio of company-funded R&D to net sales.[8] 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 reached its highest reported level of 4.2% in 2001; R&D performance remained steady compared with the previous year, while sales of R&D-performing companies declined. Since then, R&D intensity has varied between 3.5% and 3.9%; in 2005, it was 3.7%.

Largest R&D Industries

Although all industries benefit from advances in S&T, industries perform different amounts of R&D.[9] Some industries have relatively low R&D intensities (0.5% or less), such as the utilities industry[10] and the finance, insurance, and real estate industries. Appendix table 4-22Excel. provides data on company-funded R&D to net sales ratios for an array of industries.[11] Six industries, four manufacturing and two services industries, account for 75% of company-funded business R&D and 95% of federally funded business R&D (table 4-4table.)[12].

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 4-4table.). Industries in this sector include companies that manufacture computers, computer peripherals, communications equipment, and similar electronic products, and companies that manufacture components for such products. The design and use of integrated circuits and the application of highly specialized miniaturization technologies are common elements in the production processes of the computer and electronic products sector.

In 2005, these industries performed at least $43.5 billion of R&D, or 19% of all business R&D.[13] Companies and other nonfederal sources funded almost this entire R&D. The focus of the R&D in this sector is on development, with less than 25% 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 2005.


The chemicals industry performed an estimated $43.0 billion of R&D in 2005. Like the computer and electronic products industries, relatively 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 2005, pharmaceutical companies performed $34.8 billion of company-funded R&D, representing 81% of nonfederal R&D funding of the chemicals sector.

The Pharmaceutical Research and Manufacturers of America (PhRMA), an industry association that represents the country's leading research-based pharmaceutical and biotechnology companies, annually surveys its members for information about their R&D. In 2005, PhRMA estimated that its members invested $31.4 billion in R&D performed in the United States, which was 19.2% of domestic sales and 15.8% of global sales (PhRMA 2006a).[14] According to PhRMA, members' domestic R&D investment supports continuing R&D on projects that originated in their own laboratories, but 25% supports R&D on products licensed from other companies (notably biotechnology companies), universities, or the government (PhRMA 2006b). In NSF's Survey of Industrial Research and Development, companies that predominantly license their technology rather than manufacture finished products are often classified in the scientific R&D services industry. Therefore, a sizable amount of biotechnology R&D that serves the pharmaceutical industry is reported in the R&D services sector (see the section entitled "R&D Services").

Computer-Related Services

Industries associated with software and computer-related services (such as data processing and systems design) performed approximately $30.5 billion of company-funded R&D in 2005. The R&D of these industries, combined with that of the computer and electronic products manufacturers discussed earlier, accounted for 33% of all industrial R&D in 2005. As computing and information technology became more integrated with every sector of the economy, the demand for services associated with these technologies boomed.

Between 1987 and 2005, the R&D of companies providing these services grew dramatically. 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 2005, the company-funded R&D of these industries (excluding engineering and architectural services) accounted for 14.7% of all company-funded industrial R&D, and these companies accounted for 3.5% of domestic sales of R&D-performing companies (table 4-5table.).[15] Although the R&D activities of computer-related services companies have grown dramatically, this group is not the sole performer of software development R&D in the United States. In fact, companies in almost every industry report expenditures for software development R&D.

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, electromedical, and control instruments manufacturing industry. To approximate the cost of defense-related R&D, one can focus on the federally supported R&D performed by these industries. In 2005, these industries reported performing $14.0 billion of federal R&D, about two-thirds of all federal industrial R&D expenditures (table 4-4table.).[16] This accounts for more than half of the $25.0 billion the "defense industry" as a whole spent on R&D, including both federal and nonfederal sources of funds. (See the section entitled "Federal R&D" later in this chapter for further discussion of defense R&D.)

R&D Services

Companies in the business of selling S&E 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; $5.1 billion in 2005. 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 $11.9 billion in 2005.[17] 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 (20% in 2005).

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 "Technology Linkages.")

Automotive Manufacturing

The sixth largest business sector in terms of R&D is automotive manufacturing. Companies in this industry reported performing $16.0 billion of company-funded R&D in 2005, accounting for 7.1% 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; for example, in 1959, automotive manufacturing accounted for as much as 16.2% of all company-funded and -performed R&D.

In 2004, nine companies in the automotive manufacturing industry reported R&D expenditures of more than $100 million, representing more than 80% 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 toward large companies, with the R&D activities of General Motors, Ford, and DaimlerChrysler dominating the sector. In their reports to the Securities and Exchange Commission, these companies reported R&D expenses of $21.1 billion in 2004 (see sidebars, "Trends in R&D for Industrial Research Institute Members" and "R&D Expenses of Public Corporations").[18]


[8] 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 more detailed discussion of value-added, see United Nations System of National Accounts 1993 (SNA 1993). For a discussion of the connection between R&D intensity and technological progress, see Nelson (1988).

[9] Industry-level estimates are complicated by the fact that each company's R&D is reported in only one industry (see sidebar, "Industry Classification").

[10] According to NAICS, the utilities industry is limited to establishments engaged in the provision of electric power, natural gas, steam, water, and the removal of sewage. Establishments that provide telephone and other communication services are included in other NAICS industries.

[11] Because federal R&D funding is concentrated among a few companies in a small number of industries, the potential for disclosing information about a particular company is high. Therefore, these data often are suppressed. This prevents the precise tabulation of total R&D performance and the calculation of R&D to net sales ratios for many industries. Appendix table 4-22 presents company-funded R&D to net sales ratios for a wide array of industries.

[12] For a recent study on the role of services industries in R&D and innovation, see Gallaher, Link, and Petrusa (2006).

[13] Suppression of federal R&D funding prohibits the precise tabulation of total R&D performance for some industries (see note 11). Lower-bound analyst estimates are given in cases where potential disclosure of company-reported data or classification issues prevents the publication of total estimates from survey data.

[14] 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 (which are trials conducted after the drug is licensed and available for doctors to prescribe), whereas the NSF survey definition does not. Also, the NSF survey sales data may contain income from sources not related to the production of drugs and medicines.

[15] The introduction of a more refined industry classification scheme in 1999 allowed more detailed reporting in nonmanufacturing industries. For the cited 2005 statistic, the R&D expenditures 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.

[16] Suppression of federal R&D funding prohibits the precise tabulation of total R&D performance for some industries (see notes 11 and 13). Lower-bound analyst estimates are given in cases where potential disclosure of company-reported data or classification issues prevents the publication of total estimates from survey data.

[17] NAICS-based R&D estimates are available only 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 $16.9 billion in 2005.

[18] 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. For an explanation of the differences between the two, see Shepherd and Payson (1999).

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