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Chapter 4. Research and Development: National Trends and International Linkages

Trends in National R&D Performance

R&D, along with other social, economic, and technological factors, creates new knowledge and contributes to innovation and the introduction of new goods, services, processes, and managerial practices. Suppliers and users of R&D include businesses, educational institutions, not-for-profit research organizations, and governments. Statistics on R&D expenditures reported by performing and funding organizations are used as metrics throughout the United States and internationally.[1] (See sidebar "Definitions of R&D.")

NSF estimates indicate that overall spending on R&D conducted in the United States was $397.6 billion (current dollars) in 2008, up from $372.5 billion in 2007 (table 4-1 ). This represents growth of 6.7%, or 4.5% in inflation-adjusted (also called constant or real) 2000 dollars.[2] The 2008 figures are preliminary, however, and may not yet fully reflect the effects of the sharp downturn in the U.S. economy and globally beginning in late 2008.

Total estimated R&D expenditures in 2008 were $13.9 billion higher in real dollars than in 2007 (table 4-1 ). Most of this increase reflected estimated increases in business R&D expenditures and funding.

Over the longer term, increases in national R&D spending have been largely uninterrupted since 1953 in both current and real dollars (figure 4-1 ). The rates of the past several years have been above the average annual growth rate over the past 20 years (5.6% in current dollars, 3.1% in constant dollars). U.S. R&D spending crossed the $100 billion (current dollars) threshold in 1984, passed $200 billion in 1997, was nearly $300 billion in 2004, and almost reached $400 billion in 2008. Over the past 20 years, the expansion of U.S. R&D spending has exceeded the pace of GDP growth, which averaged 5.3% in current dollars and 2.8% in constant dollars, with the difference becoming more substantial in the past few years.

The economic stimulus package enacted in early 2009 (American Recovery and Reinvestment Act of 2009 [Public Law 111-5]) provided a substantial increase in federal FY 2009 funding for R&D and R&D infrastructure ($18.3 billion). However, these one-time funds do not enter into the federal funding base for subsequent fiscal year budgets, as discussed in the federal R&D section of this chapter.

Estimates of U.S. R&D expenditures are generated by adding the annual R&D spending of all sectors of the economy for which expenditures can be reasonably estimated. The spending figures come from surveys of organizations that historically have performed the vast majority of R&D in the United States; however, some components of national R&D performance are not reflected in current NSF data, and measurement challenges remain. For a further discussion of R&D activities not currently captured in NSF's official R&D statistics, see the sidebar "Unmeasured R&D."

Performers of R&D

NSF tracks the R&D spending patterns of several performers in the overall U.S. R&D system: businesses, the intramural R&D activities of federal agencies, federally funded R&D centers (FFRDCs),[3] universities and colleges, and other nonprofit organizations.

Business Sector
Estimated spending for R&D performed in the United States by businesses totaled $289.1 billion (current dollars) in 2008 (table 4-1 ). NSF estimates that business R&D expenditures in 2008 expanded in real terms (constant dollars) by 5.1%, outpacing the real growth of total U.S. R&D in the same year (4.5%). Similarly high rates of growth prevailed for business R&D in 2005, 2006, and 2007, and again, the growth in business R&D outpaced that of total U.S. R&D.

The business sector is by far the largest performer of U.S. R&D, accounting for 73% of the total in 2008 (figure 4-2 ). The high-water mark of the business sector's share of U.S. R&D to date was 75% in 2000. Over the next 4 years, its share declined to about 70% in response to the slowdown of the U.S. economy in 2001 and 2002 and the associated curtailment of business activities by many R&D-performing firms. With the renewal of vigorous business activity thereafter, business spending on R&D moved to a higher-growth path. The business sector's share of R&D rose above 70% in 2005 and has since continued to increase.

Over the past 5 years, expanded business spending on R&D has accounted for much of the growth (in both current and real-dollar terms) in all U.S. R&D spending. The most striking trend when contrasting business-sector R&D with that of other performers over the past several decades is the sustained, far larger real-dollar expansion in the level of R&D spending by the business sector (figure 4-3 ).

As discussed in the section "R&D by Character of Work," three-quarters of the business sector's R&D performance in recent years has been directed toward development activities rather than basic and applied research. Other U.S. R&D performers are relatively more active with respect to basic and applied research.

The business sector is the chief source of funding for its own R&D spending. In 2008, it is estimated that $263.3 billion, or 91%, of the business sector's overall R&D expenditures ($289.1 billion) came from the business sector itself (table 4-2 ), with the balance ($25.8 billion) coming from the federal government. Before the late 1960s, the federal government was the primary source of funding for business R&D.

Note that the decline in federal funding of business R&D, as reported by businesses, differs somewhat from the trend apparent in R&D spending data collected from federal agencies. For details on this discrepancy, see the sidebar "Tracking R&D: The Gap Between Performer- and Source-Reported Expenditures" later in this chapter.

Universities and Colleges
Universities and colleges performed an estimated $51.2 billion of R&D in 2008. The academic sector is the second-largest performer of U.S. R&D. It currently represents just below 13% of total U.S. R&D performance, about a fifth of the size of business R&D. In the late 1990s and first years of the current decade, academic R&D grew faster than R&D in any other U.S. sector, with real annual growth rates in the range of 6% to 8%. After 2004, however, real growth has been much slower, falling to 2.1% in 2008, well below the real growth rates for business R&D and total U.S. R&D.

Universities and colleges are estimated to have performed more than half (56%) of the nation's basic research in 2008. (See "R&D by Character of Work.") They also rely much more than the business sector on external R&D funding. In 2008, about 27% of academic R&D was funded by the institutions themselves; 59% was funded by the federal government; and the balance was funded by state and local governments, nonprofits and other types of organizations, and private gifts (table 4-2 ).

Federal Agencies and FFRDCs
R&D performance by the federal government (which spans the activities of agency intramural research laboratories, agency planning and administration of both intramural and extramural R&D projects, and the FFRDCs) totaled an estimated $41.7 billion in 2008, about 11% of all U.S. R&D performance. Federal agencies' intramural R&D activities (including the aforementioned planning and administration costs) accounted for $27.0 billion (6.8%) of the U.S. total, and FFRDCs accounted for $14.7 billion (3.7%). Federal agencies' intramural R&D performance is entirely funded by the federal government; FFRDCs also rely chiefly on federal funding, with small amounts of nonfederal funds at some facilities.

Real expenditures for R&D conducted by federal agencies and FFRDCs combined grew rapidly from 2001 to 2003, reflecting increased defense spending following the terrorist attacks of September 11, 2001. From 2004 to 2007, federal government R&D performance was essentially flat. It is estimated to have returned to modest growth in 2008, with increases in both federal intramural and FFRDC R&D performance.

The volume of the federal government's R&D performance is small compared with that of the U.S. business sector. However, the federal sum of $41.7 billion exceeds the national R&D expenditures of every country except Japan, China, and Germany. Furthermore, this federal expenditure does not include sizable government investments in R&D infrastructure and equipment. In addition, the federal government maintains research facilities and conducts research projects that would be too costly or risky for a single company or university to undertake.

Other Nonprofit Organizations
The figure for R&D performed in the United States by other nonprofit organizations in 2008 was an estimated $15.6 billion. This amount represents about 4% of all U.S. R&D in that year, a share that has been fairly stable since 2000.

Sources of R&D Funding

The funding for R&D conducted by organizations in the United States comes from a variety of sources, including their own funds, as well as contracts and grants from other organizations. The funding mix varies across the main performing sectors. Data on the flows of R&D funding within sectors, such as between two companies, are limited, but data on the flows of R&D between sectors indicate that financial relationships between organizations play a significant role in the U.S. R&D system.

In 2008, an estimated 19% of U.S. R&D ($74 billion, current dollars) came from funding by an organization in a sector other than the performing sector (table 4-2 ). Most of this between-sector funding comes from the federal government, which supports significantly more R&D than it conducts in its own laboratories and FFRDCs. In sharp contrast, most businesses use a high percentage of their R&D budgets for internal projects or to contract for R&D performed by other businesses. The small remainder—about 2% of overall business funds for R&D—flows to universities and other nonprofit organizations to support R&D performance.

R&D Funding by the Federal Government
In 2008, according to the reports of R&D performers, the federal government funded an estimated $103.7 billion (current dollars) of R&D (table 4-1 ). This amount represented about 26% of all R&D funding in the United States (figure 4-2 ).

The federal government was once the predominant sponsor of the nation's R&D, funding some 67% of all U.S. R&D in 1964 (figure 4-4 ). But the federal share decreased in subsequent years, falling to below 50% in 1979 and to a low of 25% in 2000. This declining share of federal R&D funding is particularly evident in the business sector. In the late 1950s and early 1960s, more than 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 (appendix table 4-3 ).

Between 2001 and 2004, however, this decades-long trend was attenuated as private investment slowed in the face of the 2001–02 recession. In addition, federal R&D spending expanded, first in health and then in defense and counterterrorism. By 2004, the federal share of the nation's R&D funding reached 30%, but thereafter it declined again to an estimated 26% in 2008.

R&D Funding by Business
The business sector is both the largest performer and the largest source of R&D funding in the United States. Business provided an estimated $267.8 billion for R&D in 2008, 67% of the U.S. total.

The business sector's share of national R&D funding first surpassed the federal government's share in 1980 (figure 4-4 ). Almost all business funding for R&D is directed toward business R&D, with a small remainder (around 2%) allocated to academic and other nonprofit performers.

From 1980 to 1985, business support for R&D grew, in real dollars, at an average annual rate of almost 8%. From 1985 to 1994, real growth dropped to 3% per year, before expanding to 9% through 2000. Growth declined by 3% a year during the 2000–02 recession, was flat in 2003–04, and has increased robustly (5% or more real growth annually) since 2005. NSF's preliminary estimate for real growth in business-sector R&D funding in 2008 is about 6%.

R&D Funding From Other Sources
R&D funding from other nonfederal sources—academia's own institutional funds, other nonprofits, and state and local governments—is small in comparison to federal and business sources, and is estimated to have been below 7% of the total in 2008. Nonetheless, this funding has been growing fairly rapidly for some time. From 1998 to 2008, growth in funding from these sectors averaged 5.4% per year in real-dollar terms—ahead of the pace of funding growth in both the federal and business sectors. Most R&D funded by these nonfederal sources is performed by the academic sector.

Finally, unlike many countries, the United States does not currently have data on domestic R&D that is funded by foreign sources. However, NSF has begun to collect these data as part of a new business survey. Separately, foreign direct investment in R&D, which is measured in the United States, provides an indication of international participation in business R&D. However, foreign ownership does not necessarily imply foreign R&D funding, because an affiliate may fund activities through its own revenues and other domestic sources. (See "R&D by Multinational Companies.")

R&D by Character of Work

R&D encompasses a wide range of activities, from fundamental research in the physical, life, and social sciences; to research addressing such critical issues as global climate change, energy efficiency, and health care; to the development of general-purpose technologies and new goods and services. Because the activities are so diverse, it helps to classify them into distinct categories when analyzing R&D expenditures.

Historically, the most common categories used to classify R&D are basic research, applied research, and (experimental) development. (See sidebar "Definitions of R&D.") In light of the complex feedback loops involved in knowledge creation and exploitation, these categories have been criticized as simplistic and too linear in their implied progression. No alternative measurement frameworks, however, have been widely adopted. Accordingly, this chapter relies on these longstanding, widely used, and internationally comparable categories (OECD 2002) to describe the current trends in the character of U.S. R&D expenditures.[4]

In 2008, the United States performed an estimated $69.1 billion of basic research, $88.6 billion of applied research, and $239.9 billion of development (table 4-2 ). Basic research represented a little more than 17% of the total; applied research, 22%; and development, just over 60% (figure 4-5 ).

Historically, the federal government has been the prime source of funding for basic research, accounting for an estimated 57% of the nation's total in 2008 (figure 4-5 ). The share of federal funding to universities and colleges, the nation's largest performers of basic research, was 61%.

Industry directs only small portions of its R&D funding to basic research—an estimated 5% in 2008 (figure 4-6 ). Many businesses believe that basic research involves significant uncertainties regarding both the near-term commercial value of any discoveries and the firm's ability to enforce intellectual property rights and earn a return. Some firms, however, view engaging in basic research (whether performed internally or in cooperation with other performers) as a way to boost human capital resources by attracting and retaining talented scientists and engineers. This can strengthen the firm's capacity for innovation and improve its ability to absorb external scientific and technological knowledge. Not surprisingly, the industries that invest the most in basic research are those whose new products are most directly tied to ongoing science and technological advances, such as the pharmaceuticals and scientific R&D service sectors.

The business sector currently spends more than four times on applied research than basic research, accounting for greater than half of U.S. applied research funding. In 2008, industry invested an estimated $53.8 billion in applied research funding, 61% of the U.S. total. Industries that perform a relatively large amount of applied research include chemicals, aerospace (mostly funded by the Department of Defense [DOD]), and R&D services (where many companies engage in the licensing of technologies).

The bulk of the federal government's applied research funds support work that is performed by the federal agencies themselves or by FFRDCs.

Development expenditures totaled an estimated $239.9 billion in 2008, representing 60% of all U.S. R&D expenditures.[5] The development of new and improved goods, services, and processes is dominated by the business sector, which funded 84% (an estimated $201.8 billion) of all U.S. development in 2008. The federal government funded most of the remaining development, totaling 15%, or $35.7 billion. Most federal development spending is defense related; this spending includes military aircraft, for which the federal government is the main customer.

The business sector performs a higher share of development activities than it funds, having conducted about 90% of all U.S. development in 2008. Federal agencies and FFRDCs conducted 8%, and all other performers combined conducted just below 2%.

R&D expenditures by public and private organizations indicate the priority given to the creation of new science and technology (S&T)-based knowledge in support of their goals. As an input measure, however, R&D expenditures do not directly lead to subsequent economic and social outputs. For one approach to measuring the role of R&D in economic output and growth, see the sidebar "The BEA/NSF R&D Satellite Account: R&D and Economic Growth."


[1] As financial input indicators, statistics on expenditures in and of themselves do not indicate the extent to which R&D efforts are effective or successful.
[2] Adjustments for inflation reported in this chapter are based on the GDP implicit price deflator. GDP deflators are calculated on an economy-wide rather than an R&D-specific basis. As such, they should be interpreted as measures of real resources engaged in R&D rather than in other activities, such as consumption or physical investment. They are not a measure of cost changes in performing research. See appendix table 4-1 for GDP deflators used in this chapter.
[3] FFRDCs are R&D-performing organizations that are exclusively or substantially financed by the federal government. They operate to provide R&D capability to serve agency mission objectives or, in some cases, to provide major facilities at universities for research and associated training purposes. Each FFRDC is administered by an industrial firm, a university, a nonprofit institution, or a consortium.
[4] The topic of R&D categories is also part of ongoing survey redesign and methodological studies in the United States and internationally.
[5] The OECD notes that in measuring R&D, the greatest source of error often is the difficulty of locating the cutoff point between experimental development and the related activities required to realize an innovation (OECD 2002, paragraph 111). Most definitions of R&D set the cutoff at the point when a particular product or process reaches "market readiness." At this point, the defining characteristics of the product or process are substantially set (at least for manufacturers if not also for services), and further work is primarily aimed at developing markets, engaging in preproduction planning, and streamlining the production or control system.

Science and Engineering Indicators 2010   Arlington, VA (NSB 10-01) | January 2010