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

U.S. Business R&D

Total U.S. business R&D performance reached a record $294.1 billion in 2011, a 5% increase from 2010 according to statistics from the Business R&D and Innovation Survey (BRDIS). However, measured in inflation-adjusted dollars, the 2011 business R&D performance of $259.4 billion (up 3% from 2010) is still below the 2008 peak of $267.7 billion, at the beginning of the most recent recession.[10] Over the past two decades, constant dollar U.S. business R&D performance follows peaks and troughs timed close to business cycle changes, short-term up-and-down movements in constant dollar GDP (figure 4-11).[11]

The company size distribution of U.S. business R&D performance has changed little since 2008. In 2011, large companies (those with 25,000 domestic employees or more) performed 35% of U.S. business R&D. Companies with 5 to 499 employees performed about 20% (appendix table 4-15).[12]

Business and other nonfederal funding sources increased 5.1% in constant dollars in 2011, the first such increase since 2008. On the other hand, federally funded business R&D as reported by performers dropped 10% in constant dollars in 2011 after a 15% decline in 2010, following increases in 2008 and 2009.

The rest of this section focuses on recent industry-level data measured in current dollars. See appendix tables 4-154-22.

Recent Trends in Domestic Business R&D

Trends in U.S. business R&D performance are driven by five industries (called “top industries” below) that together accounted for $239.0 billion, or 81%, of domestic business R&D performance in 2011: computer and electronic product manufacturing, chemicals manufacturing (including pharmaceuticals), transportation equipment (including aerospace), information (including software publishers), and professional, scientific, and technical (PST) services.

Manufacturing industries historically account for the largest share of U.S. business R&D performance (68% in 2011). However, between 2010 and 2011, nonmanufacturing industries’ R&D grew faster (12.7%) than manufacturing R&D (2.4%). Indeed, the largest growth in domestic R&D performance among the top five industries in 2011 occurred in information services (13.6%) and PST services (13.4%). Computer and electronic product manufacturing increased by 4.7%. The other two top industries posted drops in R&D expenditures: chemicals (4.7% decrease, including 7.0% decline in pharmaceuticals) and transportation equipment (4.7% decrease) (figure 4-12; appendix table 4-15).

Overall, domestic R&D performance bounced back by 5.4% from 2010 to 2011 after declining 2.9% during the recession years from 2008 to 2009. Company and other nonfederal funding sources increased 7.4% in 2010­–11 after declining 4.5% in 2008–09. In contrast, federal sources decreased 8.5% in 2010–11.

At the same time, federal funding accounted for only 10.6% of domestic business R&D in 2011, down from 12.3% in 2010. This funding source is also highly concentrated in some industries, based on 2010 detailed statistics. The highest shares of federal funding for domestic business R&D are in transportation equipment manufacturing (47%), which includes aerospace (63%); in PST services (20.3%), which includes scientific R&D services and architectural, engineering, and related services; and in computer and electronic products manufacturing (9.9%) (figure 4-13).

Apart from direct funding for R&D in the form of contracts and grants to businesses, the U.S. government offers indirect R&D support via fiscal incentives such as tax credits (see sidebar, “Federal R&E Tax Credit”).

Domestic and International Funding Sources, by Type of Source

Funding for domestic business R&D may be classified by the geographic location of funding sources, by ownership, and by a combination of these categories according to new details available from BRDIS. Most domestic R&D is funded from domestic sources (regardless of ownership) and by company-owned units (regardless of their location). In 2011, $238.8 billion (81.2% of $294.1 billion of domestic R&D performance) was funded internally (company-owned units regardless of location), including $3.3 billion by subsidiaries located abroad (table 4-7; see also appendix tables 4-154-19).

More generally, the $294.1 billion in 2011 U.S. business R&D performance can be partitioned in four major funding and location sources (table 4-7). The largest of these four components, $235.4 billion (80% percent), was funded by U.S.-located, within-company sources. Domestic external sources funded another $43.1 billion (15%). The bottom left row in figure 4-14 shows the distribution of these external domestic sources, the largest of which is the federal government. Overall, $278.6 billion (95%) of domestic business R&D performance was funded by U.S.-located sources in 2011, as summarized in the left panels of figure 4-14.

The remainder, $15.5 billion (5%), was funded by sources from abroad as shown in the right panels of figure 4-14. These sources may be classified by ownership or affiliation, namely, subsidiaries abroad owned by U.S.-located companies, foreign parents of U.S.-located companies, or independent foreign sources (primarily companies).

Table 4-8 provides further detail on 2011 funding from abroad for selected industries by affiliation and type of organization (for-profit companies, foreign governments, and others, including foreign universities). Virtually all of the $15.5 billion in funding from abroad for domestic business R&D performance came from other companies. About half (48%) came from foreign parent companies, 29% came from foreign independent companies, and 22% came from company-owned units abroad (see also appendix table 4-17 and appendix table 4-19).

The top five industries received $12.4 billion, or 80%, of total funding from abroad in 2011, about the same share of these industries in total domestic performance (81%). However, chemicals (including its pharmaceuticals and medicines component) and PST services (including its scientific R&D services component) accounted for a larger share in funding from abroad compared with their share in total domestic R&D performance.

At the same time, sources of funding from abroad differ considerably for pharmaceuticals and scientific R&D services. Over half ($1.0 billion or 55%) of funding from abroad for scientific R&D services companies came from foreign independent companies, with the balance coming almost exclusively from foreign parents ($809 million or 43%) (table 4-8). For pharmaceuticals, affiliated sources dominated funding from abroad (26% from subsidiaries located abroad and 39% from foreign parents), based on BRDIS statistics, consistent with the high level of outward and inward foreign direct investment (FDI) in R&D in this industry discussed later in this chapter. Foreign independent companies accounted for a third (34%) of funding from abroad for this industry.

Business Activities for Domestic R&D

Data at the industry level presented above are obtained by classifying a company’s total R&D into a single industry, even if R&D activities occur in multiple lines of business. For example, if a company has $100 million in R&D expenses—$80 million in pharmaceuticals and $20 million in medical devices—the total R&D expense of $100 million will be assigned to the pharmaceuticals industry because this is the largest component of its R&D expense (Shackelford 2012). In addition to collecting data by the main industry classification, BRDIS collects data by lines of business most closely related to R&D expense. Codes for line of business are collected at a rather fine level of detail, as indicated in appendix table 4-20. However, most companies performed R&D in only one business activity area. In 2010, 86% of companies reported domestic R&D performed by and paid for by the company related to only one business activity. See Shackelford (2012) for an in-depth analysis of the relationship between business codes and industry codes.

[10] The last recession was officially dated December 2007 to June 2009. For details, see
[11] See Archibugi, Filippetti, and Frenz (2013) and references therein for studies on the relationship of R&D, innovation, and business cycles.
[12] BRDIS does not collect data for companies with fewer than five employees. See sidebar, “ Measured and Unmeasured R&D,” for more details including a new survey under development to cover these companies.