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Chapter 4. R&D: National Trends and International Comparisons

Trends in National R&D Performance

The U.S. R&D system consists of a variety of performers and sources of funding, including businesses, the federal government, universities and colleges, other (nonfederal) government, and nonprofit organizations. Organizations that perform R&D often receive significant levels of outside funding; those that fund R&D may also be significant performers. (See sidebar, "Measured and Unmeasured R&D.") The discussion throughout this section examines current levels and key trends in U.S. R&D performance and funding (see Glossary for definitions).[2] Supporting this section is a series of appendix tables (appendix tables 4-3 through 4-10) that report core data on U.S. national patterns of R&D funding and performance.

Trends in U.S. R&D Performance and R&D Intensity

Overall spending on R&D conducted in the United States in calendar year 2009 is estimated to have totaled $400.5 billion, somewhat below the 2008 level of $403.0 billion, but well above the $377.0 billion in 2007 (current dollars) (table 4-1). Adjusted for inflation, the 2009 level is a $6 billion or 1.7% decline from 2008.[3]

The 2009 spending slowdown primarily reflects a drop in business R&D in both current and constant dollars in the face of the 2008–09 financial crisis and economic recession. However, R&D spending in other sectors continued to rise, in both current and constant dollar terms. Some of this was the effect—notably for federal and academic R&D and R&D infrastructure—of the one-time $18.3 billion funding increase appropriated in the American Recovery and Reinvestment Act of 2009 (ARRA, Public Law 111-5, enacted in February 2009).

The 2009 slowdown in spending growth notwithstanding, increases in national R&D spending have occurred largely uninterrupted since 1953 in both current and real dollars (figure 4-1). U.S. R&D spending crossed the $100 billion (current dollars) threshold in 1984, passed $200 billion in 1997, exceeded $300 billion in 2004, and was at or above $400 billion in both 2008 and 2009.

The year-over-year rate of R&D funding growth outpaced that of gross domestic product in each of the last 3 years—even during the economic downturn (table 4-2). Over the last 5 years (2004–09), annual growth in the total of R&D spending averaged 5.8%, compared to GDP at 3.3%. And, similarly, growth in total R&D spending outpaces that of GDP when the averaging period is either 10 or 20 years. The same relative findings prevail when the dollars are adjusted for inflation (table 4-2).

R&D intensity—a country's national R&D expenditures expressed as a percentage of its GDP—provides another gauge of overall national R&D performance and is a widely used target-setting tool internationally.

In 2009, the U.S. R&D/GDP ratio was nearly 2.9%, rising from around 2.8% in 2008 and 2.7% in 2007 (figure 4-2). The ratio has ranged from 1.4% in 1953 to a high of nearly 2.9% in 1964 and has fluctuated in the range of 2.1% to 2.8% in the subsequent years.

Most of this continuity in the U.S. R&D/GDP ratio reflects the growth in nonfederal R&D spending, which rose from about 0.6% of GDP in 1953 to just below 2.0% in the last several years. The increase reflects the growing role of business R&D in the national R&D system and, more broadly, the growing prominence of R&D-derived goods and services in the national and global economies.

The peaks and valleys in the U.S. R&D/GDP ratio also reflect changing federal R&D priorities. The ratio's drop from its peak in 1964 resulted largely from federal cutbacks in defense and space R&D programs. From 1975 to 1979, gains in energy R&D activities worked to keep the ratio stable. Beginning in the late 1980s, cuts in defense-related R&D lowered the federal R&D/GDP ratio, which was counterbalanced by a steady or rising nonfederal ratio. Since 2000, increased federal spending for, notably, defense and biomedical research have helped to push upward the federal ratio.

Performers of R&D

The National Science Foundation (NSF) tracks the R&D spending patterns of all the major performers in the overall U.S. R&D system: businesses, intramural R&D activities of federal agencies, federally funded R&D centers (FFRDCs), universities and colleges, and other nonprofit organizations. For state-level detail see sidebar, "Location of R&D Performance by State" and chapter 8.

Business Sector

The business sector is by far the largest performer of U.S. R&D. R&D performed by businesses in the United States totaled an estimated $282.4 billion in 2009 (table 4-1), about 71% of total U.S. R&D (figure 4-3). This predominance of the business sector has long been the case (figure 4-4), with shares of national R&D performance ranging from 69% to 75% over the course of the last 20 years. The business sector is also the nation's largest R&D funder, accounting for about 62% of the U.S. total.

A decline of business R&D performance from $290.7 billion in 2008 to $282.4 billion in 2009 was the first such year-to-year decline since 2002. Nevertheless, business R&D performance rose on average (table 4-2) at 6.3% annually from 2004 to 2009, outpacing the growth rates of both total U.S. R&D (5.8%) and gross domestic product (3.3%). After adjusting for inflation, business R&D grew at a 3.6% annual rate, total R&D at 3.1%, and U.S. GDP at 0.7%).

Universities and Colleges

Universities and colleges performed $54.4 billion of R&D in 2009 (table 4-1). This was almost 14% of total U.S. R&D spending that year, making academia the second-largest performer of U.S. R&D (figure 4-3).

Academic R&D spending increased in each of the last 5 years (in both current dollars and constant dollars). The academic share in total U.S. R&D has ranged between 11% and 14% over the past 20 years.

Universities and colleges have a special niche in the nation's R&D system: they performed more than half (53%) of the nation's basic research in 2009. Academic institutions also rely much more extensively than the business sector on external sources of funding, particularly the federal government, at about 60%, to support the R&D they perform. (See chapter 5 for an extensive analysis of academic R&D.)

Federal Agencies and FFRDCs

R&D performed by the federal government includes the activities of agency intramural research laboratories and federally funded research and development centers (FFRDCs). The figures for intramural R&D also include expenditures for agency planning and administration of both intramural and extramural R&D projects. Federal agencies' intramural R&D performance is funded entirely by the federal government. FFRDCs are R&D-performing organizations that are exclusively or substantially financed by the federal government. An FFRDC is operated 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.

R&D spending by federal intramural labs and FFRDCs was $46.2 billion in 2009, about 12% of all U.S. R&D (table 4-1). Of this amount, $30.9 billion (8% of all U.S. R&D) was intramural and $15.3 billion (4%) was R&D by FFRDCs.

Spending on this federal R&D performance grew rapidly from 2001 to 2003, primarily reflecting increased defense spending following the terrorist attacks in the United States on September 11, 2001. A slower pace of growth has prevailed, however, since then.

The volume of the federal government's R&D performance is small compared with that of the U.S. business sector. Nonetheless, the $46.2 billion performance total in 2009 exceeds domestic R&D expenditures of every country except Japan, China, and Germany. And this figure does not include government investments in R&D infrastructure and equipment, which support the maintenance and operation of unique research facilities and the conduct of research activities that would be too costly or risky for a single company or university to undertake.

Other Nonprofit Organizations

R&D performed in the United States by nonprofit organizations other than universities and certain FFRDCs is estimated at $17.5 billion in 2009. This amount represents just over 4% of all U.S. R&D in that year, a share that has been fairly stable since 2000.

Sources of R&D Funding

Funds that support the conduct of R&D in the United States come from a variety of sources, including businesses, federal and other governments, academic institutions, and other nonprofit organizations. The mix of funding sources varies by performer.

R&D Funding by Business

The business sector, the largest performer of U.S. R&D, is also its largest funder, at about $247.4 billion in 2009 or about 62% of the U.S. total (table 4-1, figure 4-3), virtually all in support of business R&D.[4] The business sector's predominant role in funding R&D began in the early 1980s, when its support began to exceed 50% of all U.S. R&D funding (figure 4-5)—a share that has continually increased over the last 30 years. Just about all business funding for R&D (98%) is directed toward business R&D performance (table 4-3). The small remainder has gone to academic and other nonprofit performers. (For a fuller discussion, see the "U.S. Business R&D" section later in this chapter.)

R&D Funding by the Federal Government

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 4-5). But the federal share decreased in subsequent years to less than half in 1979 and to a low of 25% in 2000. Changing business conditions and expanded federal funding of health, defense, and counterterrorism R&D pushed it back up above 30% in 2009.

The federal government remains a major source of funds for all U.S. performer sectors except private business, where its role (while not negligible) is substantially overshadowed by business's own funds.

In 2009, according to the reports of R&D performers,[5] the federal government provided an estimated $124.4 billion (current dollars) of R&D funds, about 31% of all U.S. spending on R&D that year (table 4-1).

In 2009, the largest recipient of federal R&D funding, $46.2 billion, was federal agencies and their FFRDCs (table 4-3). FFRDCs also received about $400 million from nonfederal sources, less than 1% of their total support.

The second largest recipient was the business sector, for which, in 2009, the federal government provided $39.6 billion of the $282.4 billion that funded business R&D. Through the early 1960s, more than half of the nation's business R&D had been funded by the federal government. This share fell below 10% by 2000 and had rebounded to 143% by 2009 (appendix table 4-3).

Federal funds to academia provided $31.6 billion (58%) of the $54.4 billion spent on academic R&D in 2009. Of the $17.5 billion spent on R&D by other nonprofit organizations, $7.1 billion (about 41%) was supported by federal funds.

R&D Funding from Other Sources

The balance of R&D funding from other sources is small: $28.6 billion in 2009, or about 7% of all funding. This includes academia's own institutional funds (which support academic institution's own R&D), other nonprofits (the majority of which fund their own R&D, but also contribute to academic research), and state and local governments (primarily for academic research).

Nonetheless, this segment of funding has been growing fairly rapidly for some time. From 1999 to 2009, 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, which also provided about one-fifth of its own total spending on R&D.

R&D by Character of Work

R&D encompasses a range of activities: from fundamental research in the physical, life, and social sciences; to research addressing such critical societal issues as global climate change, energy efficiency, and health care; to the development of platform or general-purpose technologies and new goods and services. Because the activities are so diverse, it helps to classify them in separate categories when analyzing R&D expenditures. The most widely used classifications distinguish among basic research, applied research, and (experimental) development (see definitions in Glossary).[6] Nevertheless, these categories are not always mutually exclusive and any particular R&D activity may have aspects of more than one category.

Basic Research

In 2009, spending on basic research activities amounted to about $76.0 billion (19%) of the $400.5 billion of total U.S. R&D (table 4-4, figure 4-6). The basic research share has gradually moved upward, from about 14% in 1979 to 19% in 2009 (table 4-4).

Universities and colleges continue to occupy a unique position in U.S. basic research. They are the primary performer of U.S. basic research (53% in 2009), while also training the next generation of researchers (table 4-4). The business sector performs nearly 20%; the federal government (agency intramural labs and FFRDCs), 15%; and other nonprofit organizations, 12%.

The federal government remains by far the prime source of funding for basic research, accounting for about 53% of all such funding in 2009 (table 4-3). Universities and colleges themselves provide about 14% of the funding. Other nonprofit organizations provide 11%.

Business's $16.5 billion devoted to basic research is small by comparison to its $247.4 billion of funding for total R&D in 2009, but it still accounted for about 22% of the overall funding for basic research.

Business views about performing basic research involve considerations about the appropriability of results, commercialization risks, and uncertain investment returns. However, involvement in basic research can help boost human capital, attract and retain talent, absorb external knowledge, and strengthen innovation capacity. Businesses that invest most heavily 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.

Applied Research

Applied research activities accounted for about 18% ($71.3 billion) of total U.S. R&D in 2009, modestly under the amount spent on basic research that year (table 4-4). Looking back over two decades, the share of applied research is somewhat lower at present than in the past: 23% 5 years ago, 21% 10 years ago, and 23% 20 years ago.

The business sector performed 58% of all applied research in 2009; the federal government (federal agency intramural labs and FFRDCs), 18%; universities and colleges, another 17%; nonprofit organizations, 8% (table 4-4).

Business provided the bulk of funding for applied research in 2009, 48%. The federal government provided 42%, and academia and other nonprofit organizations each contributed around 5%.

Business sectors that perform relatively large amounts of applied research include chemicals and aerospace. The federal funding is spread broadly across all the performers, with the largest amounts (in 2009) going to federal intramural labs, the business sector, and universities and colleges.

Development

Development, the most sizable component of U.S. R&D, accounted for 63% ($253.2 billion) of total national R&D in 2009 (table 4-4).[7] Development's share of total national R&D has been near or above 60% for several decades.

The business sector performed 90% ($226.6 billion) of this development total, and the federal government (agency intramural labs, FFRDCs), another 9%—much of it defense-related, with the federal government the main consumer. By contrast, academic and other nonprofit organizations perform very little of U.S. development, each performing less than 1% of the total in 2009.

The business sector also provided about three-quarters (78%) of development funding ($196.5 billion) in 2009, nearly all of it in support of business development activities (table 4-3). The federal government provided 21% ($53.9 billion) of the funding, with more than half going to business development—especially in defense-related industries—and most of the remainder going to federal intramural labs and FFRDCs.

Universities and colleges and other nonprofit organizations provide small amounts of funding to support development performance in their own sectors.

R&D, GDP Growth, and Innovation-Related Metrics

Intangible inputs such as R&D are important sources of long-term economic growth (Corrado et al. 2006; Jorgenson 2007; Van Ark and Hulten 2007). The role of R&D in U.S. GDP has been estimated based on a methodology published in the Bureau of Economic Analysis (BEA)/NSF R&D Satellite Account (Lee and Schmidt 2010). This methodology treats R&D as an investment rather than as an expense. Using this methodology, a preliminary estimate of R&D on inflation-adjusted GDP from 1959 to 2007 suggests faster average annual GDP growth of 0.07 percentage point over treatment of R&D as an expense.[8]

Over this period, the difference in average growth estimates using these two methodologies was higher in the immediate post-War boom, dropped to almost zero from 1974 to 1994 (a period that includes the productivity slowdown of the 1970s), and then increased relative to the overall average since 1995—years associated with IT-led productivity growth (Jorgenson et al. 2005b) (table 4-5). For other data developments activities, see sidebar, "Recent Developments in Innovation-Related Metrics."

Notes

[2] For an annotated compilation of definitions of R&D by U.S. statistical agencies, tax statutes, accounting bodies, and other official sources, see NSF (2006).
[3] 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 R&D. See appendix table 4-1 for GDP deflators used in this chapter.
[4] R&D funding by business in this section refers to nonfederal funding for domestic business R&D plus business funding for U.S. academic R&D and nonprofit R&D performers.
[5] Federal support for R&D reported by federal agencies in the form of obligations differs from expenditures of federal R&D funds reported by R&D performers. For a discussion of the reasons for, and the magnitude of these discrepancies, see sidebar "Tracking R&D: The Gap Between Performer- and Source-Reported Expenditures" later in this chapter.
[6] Contemporary discussions often note the extensive feedback loops among basic research, applied research, and development that prevail in the conduct of R&D. On this basis, there is often-heard criticism that this standard trio is simplistic and erroneously implies a linear progression. Even so, an alternative framework has yet to be identified to wide acceptance. Accordingly, the chapter relies for its analysis on the standard trio of categories, which have been longstanding, widely used, and internationally comparable (OECD 2002).
[7] 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.
[8] These estimates measure solely the direct impact of R&D investment. Although indirect productivity impacts of R&D are included in BEA's industry output measures, estimates of the impact of R&D based on the R&D Satellite Account do not separately identify spillovers, the indirect benefits to firms that did not pay for the R&D. For R&D spillovers in the context of national accounts measures, see Sveikauskas (2007).
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