National Trends in Research and Development Expenditures

Total U.S. investment in R&D reached an estimated $171 billion in 1995, up 1 percent in current dollars over the estimated 1994 level, but down 2 percent after adjustment for inflation.
1 Growth in R&D funding in the United States has not kept pace with inflation. R&D expenditures have been shrinking in recent years, although the annual decreases have been small, averaging an estimated 0.8 percent between 1991 and 1995. Prior to 1991, the last time there was a constant-dollar reduction in total U.S. R&D spending was in 1975. Between 1975 and 1982, the inflation-adjusted annual rate of increase averaged 4.1 percent; this rate rose to 8.1 percent between 1982 and 1985, and slowed to 2.1 percent in the years leading up to 1991. (See figure 4-1 and appendix tables 4-3 and 4-4.)


National Research and Development Trends by Source of Support and Performing Sector

There are two major sources of financial support of R&D activity - industry and the Federal Government. Together, these two sectors supply approximately 95 percent of all money spent on R&D performed in the United States. The remaining 5 percent is provided primarily by universities and colleges and nonprofit organizations.2 (See figure 4-2 and appendix table 4-4.)

In addition to financing R&D, industry and the Federal Government are major R&D performers. A third sector, academia, also plays a major role in the performance of research. Industry, the Federal Government, and academia are responsible for 70 percent, 10 percent, and 13 percent, respectively, of national R&D investment. Two other groups - nonprofit organizations and university-administered FFRDCs3 - each account for 3 percent of total R&D spending.


Sources of R&D Support

The industrial sector is both the largest source of R&D funds and the leading R&D-performing sector in the United States. In 1995, companies provided an estimated $101.7 billion to support R&D performed in the United States, or 59 percent of the national total. Of this amount, $99.3 billion financed work performed in-house; the remaining $2.4 billion was used to support R&D activities undertaken at academic institutions and nonprofit organizations. (See appendix tables 4-3 and 4-4 and text table 4-1.)

Industry has not always been the largest source of R&D dollars in the United States. It took over that role from the Federal Government in 1980. (See figure 4-1 and appendix table 4-4.) In 1970, Federal agencies supplied 57 percent of all dollars spent on R&D in the United States. During the ensuing decade, however, industry R&D support grew at a faster pace than that of the Federal Government, so that in 1980 industry became the leading source of R&D dollars. In the early and mid-1980s, the industry share of the R&D total was fairly stable, hovering slightly above the 50-percent mark. In 1987, that proportion began to rise again, 1 or 2 percentage points per year. The most recent data show industrial firms providing $3 out of every $5 spent on R&D in the United States. (See figure 4-3 and appendix table 4-4.)

In recent years, industry R&D financing almost - but not quite - kept pace with inflation. Between 1975 and 1985, industrial R&D funding more than tripled, increasing at an average constant-dollar rate of 6.7 percent per year. In the late 1980s, the annual rate of increase slowed to 5.9 percent, the average registered between 1987 and 1991. According to recent estimates, there has been no real growth since 1993. (See figure 4-1 and appendix table 4-4.)

The Federal Government, the other major source of R&D support in the United States, provided an estimated $61 billion in R&D funds in 1995, or 36 percent of the national total. Most Federal R&D dollars are not used in Government-owned laboratories, but instead are used to finance R&D performed in other sectors. (See figure 4-4 and appendix table 4-3.) For example,

Like industry R&D support, there has been a lack of growth in Federal R&D funding in recent years. The trend started in the late 1980s, earlier than the industry slowdown, and the cutbacks were larger. Between 1987 and 1995, Federal R&D support fell at an average annual constant-dollar rate of 2.6 percent. In addition, while industry's share of the national total has been climbing, the Federal share has been eroding - from 46 percent of the total in 1987 to an estimated 36 percent in 1995. (See figures 4-1 and 4-3 and appendix table 4-4.)


National Research and Development Trends by Performing Sector

Industry

Industry has always been the largest R&D performing sector, by far. Because companies perform a substantial amount of R&D for the Federal Government, the industrial sector is responsible for $7 out of every $10 spent annually on R&D conducted in the United States. In 1995, R&D performed in U.S. industrial laboratories is estimated to have cost $119.6 billion.

After 16 years of continuous growth during the late 1970s and throughout the 1980s, industrial R&D performance underwent a turnaround in the early 1990s. Industrial R&D performance fell at an estimated average annual rate of 1.5 percent per year in constant dollars between 1991 and 1995. The cutbacks can be considered a continuation of a slowdown that began in the late 1980s. Between 1985 and 1991, there was a marked reduction in the rate of expansion of industrial R&D programs. During that period, the annual real rate of increase averaged only 1.8 percent, compared with the 6.1-percent rate registered during the late 1970s and early 1980s. (See figure 4-5 and appendix table 4-4.)

The slowdown in industrial R&D performance is largely attributable to Federal R&D cutbacks. Government-funded R&D performed by companies dropped from $30.8 billion in 1987 to an estimated $22.1 billion in 1995. (See figure 4-6 and appendix tables 4-8, 4-9, and 4-10.) As a result, the Federal share of total industrial R&D expenditures declined from nearly one-third of the total in 1987 to 17 percent in 1995.

Data for the years after 1985 indicate industrial R&D performance continuing to increase, but only in the service sector.4 During the last part of the 1980s, R&D conducted in the manufacturing sector slowed to a standstill, the beginning of a trend that has continued into the 1990s.

Several reasons have been cited for the lack of growth in some companies' R&D programs in the mid-1990s. These include corporate downsizing, decentralization (i.e., a shifting of R&D activity from corporate laboratories to individual business units), and increasing collaboration among industrial firms and with partners in academia, government, the nonprofit sector, and in other countries (Institute for the Future, 1995; Bean, 1995; Wolff, 1995). (See Collaboration Among Firms and with Other Organizations in this chapter.)


Academia

Academia is a distant second to industry in terms of R&D performance, with total expenditures amounting to an estimated $21.6 billion in 1995, or 13 percent of the national total. Until 1990, the academic sector ranked third in total R&D performance in the United States, after industry and the Federal Government. Since 1985, however, the rate of increase in R&D performed at universities and colleges has been higher than that of the Federal Government. As a result, these institutions moved into second place in 1990, behind industry. (See figure 4-5 and appendix table 4-4.)

Academia is the only R&D-performing sector not to have suffered a constant-dollar decline in R&D performance during the 1990s. However, the annual real rate of growth has been falling fairly steadily since 1986, dropping from a nearly 10-percent increase in 1985-86 to a less than 1-percent change estimated for 1994-95.

Most of the research performed on university and college campuses is funded by the Federal Government. In 1995, Federal agencies provided an estimated $13.0 billion, or 60 percent of the total funding for university research. Academic institutions supplied an estimated $3.9 billion of their own funds, nonfederal sources (i.e., state and local governments) and nonprofit organizations each contributed $1.6 billion, and industry provided $1.5 billion. R&D support from each of these sectors rose during the 1990s, with Federal agencies registering the largest absolute and percentage increase - 35 percent in current dollars or 3.2 percent per year in real terms. Federal R&D support to academia has been increasing continuously since 1982, even after adjustment for inflation. (See figure 4-4 and appendix table 4-3.)

The expansion in Federal support of research performed at colleges and universities is the only exception to what has otherwise been a shrinking pool of (inflation-adjusted) Federal R&D financial resources. As mentioned earlier, the largest part of the Federal R&D budget - that part devoted to defense and national security - has been on a strict diet since the late 1980s. (Defense downsizing has had the greatest impact on the military's industrial contractors and on the nonprofit organizations that conduct R&D for DOD and DOE.)


Federal Agencies

Federal entities spent an estimated $16.7 billion on intramural R&D in 1995, 10 percent of national R&D performance. Most Federal R&D monies are not spent in federally run facilities, but in other sectors. Federal intramural R&D has shown very little change in real terms since 1985. There have been some noticeable year-to-year gains and losses, but these changes were usually counterbalanced in subsequent years. For example, an 8.6-percent real decline in Federal R&D performance between 1990 and 1991 was partially offset by gains during the following 2 years. Federal R&D performance is estimated to have dropped 5.5 percent in constant dollars between 1994 and 1995. (See appendix table 4-3 and figure 4-5.)


Research and Development Support and Performance by Character of Work

The traditional way to analyze trends in R&D performance is to examine the amount of funds devoted to basic research, applied research, and development. (See Definitions.) These terms are convenient because they correspond to popular models that presume that innovation occurs in a straight-line progression through three stages: scientific breakthroughs from the performance of basic research lead to applied research, which, in turn, leads to development or the application of applied research to commercial products and processes. Although the simplicity of this approach makes it appealing to policymakers, the traditional categories of basic research, applied research, and development are somewhat murky and, thus, are not always ideal in describing the complexity of the relationship between science, technology, and innovation in the real world.

Over the years, alternative models have been developed in an attempt to capture the true complexity of the innovation process. One that has recently received a favorable amount of attention is a model developed by Donald Stokes of Princeton. (See Alternative Models of R&D and Innovation.) Although this and other models may provide a more realistic depiction of the innovation process than does the linear model, they are probably too complicated to be used in collecting comparable and reliable data for policymaking purposes. Therefore, the practice of categorizing R&D expenditures into basic research, applied research, and development for analytical and policymaking purposes is unlikely to be abandoned anytime soon.

Most R&D dollars - an estimated $101.7 billion in 1995, or 59 percent of the total - are spent on development. Applied research accounted for an estimated 23 percent, and basic research, 17 percent. (See figure 4-2.) These proportions tend to be fairly stable over time, although there are usually slight movements from year to year. For example, the proportion of total R&D funds devoted to development has been falling for the past decade, declining from 65 percent in 1985, while funds used for basic research increased from 12 percent to 17 percent.5 These trends are not unexpected given that (1) most military-related R&D is development, and defense appropriations declined during the period, and (2) about half the Nation's basic research is conducted on university and college campuses. As mentioned previously, R&D conducted in the academic sector has been relatively healthy compared with R&D performed in the other sectors.


Basic Research

In 1995, an estimated $29.6 billion was spent on basic research performed in the United States. Most of that amount - $17.1 billion or 58 percent of the total - was supplied by the Federal Government. Industrial firms provided $7.5 billion or 25 percent of the total; universities and colleges, $3.4 billion; and nonprofit organizations, $1.6 billion. (See figure 4-7 and appendix table 4-5.)

Although the Federal Government is the leading supplier of funds, the academic sector is the largest performer of basic research, with expenditures totaling an estimated $14.5 billion in 1995. Of that amount, an estimated $9.2 billion were Federal funds. Far smaller amounts were supplied by the universities themselves, state and local governments, industry, and nonprofit organizations. Federal funding of basic research performed in the academic sector increased during the 1990s, but the average annual real rate of increase - 3.2 percent - was about half the rate registered between 1985 and 1991.

An estimated 6 percent of the funds spent on basic research in academic institutions in 1995 came from industrial sources. Industry's support of research conducted on university and college campuses has always been a small, but growing, component of the academic research portfolio.6 Industry officials have tapped this resource not only because their companies benefit from the results of the research they sponsor, but also because they recognize that such research opportunities are a crucial component in training future scientists and engineers, many of whom will one day be working in their laboratories. In addition, companies are depending on universities and the Federal Government to maintain basic research activities because their own programs are being curtailed.

Industrial firms spent an estimated $6.2 billion of their own and nearly $1 billion in Federal funds on basic research undertaken in their laboratories in 1995. Basic research constitutes an estimated 6 percent of total industrial R&D performance. Between 1991 and 1995, the amount of funds spent by industry to perform basic research declined at an average annual, constant-dollar rate of 4.6 percent.

In the past few years, several companies' central research facilities have been dismantled, part of an ongoing shift in emphasis away from fundamental research and toward applied research and development that has occurred largely in reaction to growing international competition in the high-tech arena. (See chapter 6, Technology Development and Diffusion.) In addition, applied research and development are increasingly being conducted within individual business units in a concerted effort to speed commercialization of new technology (Bean, 1994).

An estimated $2.7 billion was used to finance basic research performed in federally-run laboratories in 1995. Funding of Federal intramural basic research (about 16 percent of total Federal intramural R&D) has remained fairly constant in real terms since 1983.


Applied Research

Nearly $40 billion, or about 23 percent of total R&D, was spent on applied research performed in the United States in 1995. (See figure 4-7 and appendix table 4-6.)

Industry is both the leading source of applied research support and the leading performer. In 1995, companies were the source of an estimated $22.6 billion spent on applied research. The proportion of all applied research funds originating in industry has been increasing steadily for the past 25 years - from 42 percent of the total in 1970 to 57 percent in 1995. At the same time, the Federal Government's share of the total has been falling - from 54 percent in 1970 to an estimated 36 percent in 1995. Both industry and the Government have curtailed their support of applied research projects in the 1990s. In real terms, the average annual rates of decrease were 1.8 percent and 2.0 percent, respectively, between 1991 and 1995.

Of the major R&D-performing sectors, industry is the only one to report a constant-dollar decline in applied research performance - averaging 3.1 percent in real terms between 1991 and 1995. Funding of applied research performed at Federal facilities and at academic institutions grew at annual rates averaging 2.1 percent and 2.3, respectively, during the same period.

Internally financed applied research was relatively flat during this period, so the industrial decline is entirely attributable to a reduction in Federal support, although the latter accounts for less than 20 percent of the money spent by companies on applied research. The recent decline in Federal support of industry-performed applied research presents a marked contrast to the 1980s. Between 1979 and 1990, funds from Federal agencies quadrupled, reaching an all-time high of $6.4 billion in 1990. Five years later, Federal funding of applied research conducted in industrial laboratories was down to an estimated $4.9 billion.

Despite the recent cutbacks, industrial firms have been the most prominent players in applied research performance during the past 25 years. In the late 1980s, more than 70 percent of the Nation's applied research was performed in industrial laboratories. That share has receded somewhat - to 67 percent - in recent years.

Along with industry, academic institutions have assumed a larger role in the performance of applied research. Their share of the total amount spent on applied research has been rising gradually for the past 25 years; they are now the second largest performer of applied research, accounting for an estimated 14 percent of the total spent in 1995.

Contrary to the overall trend, there was an upsurge in applied research performed on university and college campuses in the 1990s. Led by an increase in Federal support (which accounts for about half the total), spending rose 25 percent - from $4.3 billion in 1990 to $5.5 billion in 1995.

In contrast, the role of Federal intramural applied research has dwindled considerably in the past 25 years. In 1995, Federal agencies spent an estimated $4.9 billion to perform applied research in their own installations; this amount accounted for only 12 percent of the national total, down from 23 percent in 1970.


Development

Six out of every 10 dollars spent on R&D in the United States are spent on development. (See figure 4-7 and appendix table 4-5.) An estimated $101.7 billion was used to finance the development of new and improved products, processes, and services in 1995; this amount was about 2 percent below the 1994 level, after adjustment for inflation. Development funding has been falling in real terms almost continuously since 1990, but the decreases have been small, averaging 1.2 percent between 1990 and 1995. This decline is largely attributable to the post-Cold-War curtailment in defense spending. Federal support of development projects has been falling in real terms since 1987.

Like applied research, industry is both the leading provider of development funds and the major performer. Industry became the largest source of development funds in 1974, overtaking the Federal Government in that year. In 1995, industrial firms were the source of an estimated $71.6 billion, or about 70 percent, of the total spent on development in the United States. All but $280 million of those funds were spent in companies' own laboratories. The Federal share of development R&D funds is now estimated to be less than 30 percent of the total, down from more than 40 percent during the late 1970s and 1980s. (See appendix table 4-7.)

Almost all development dollars are spent by industrial firms. Advancing and applying new technologies are activities undertaken almost exclusively in the private, profit-making sector. The most recent data show that the other R&D-performing sectors, including the Federal Government, universities and colleges, and nonprofit organizations, are responsible for spending only 14 percent of the national total. Of the estimated $87.6 billion expended by industry on development in 1995, an estimated $16.3 billion, or 19 percent of the total, came from Federal contracts.

Federal support of development projects conducted in industrial laboratories increased dramatically between 1980 and 1988, doubling from $11.8 billion to an all-time high of $25.1 billion during that period. Much of that increase is attributable to the massive defense buildup during the Reagan era, when a wide array of new, highly sophisticated defense systems and weapons, including the Strategic Defense Initiative, went on the drawing board. Since 1988, there has been a major curtailment in Federal funding; a 35-percent drop was registered between 1988 and 1995.

In contrast to the decline in Federal support of industry-performed development activities, funding from other sources (essentially industry's own funds) rose during the 1990s, from $59.4 billion in 1990 to $71.3 billion in 1995, an average annual real increase of about 1 percent per year.

The Federal Government is a distant second to industry in terms of development performance. Federal agencies spent an estimated $9.1 billion in 1995, about a billion dollars below the 1990 level. In real terms, Federal intramural performance of development fell at an average annual rate of 4.7 percent between 1990 and 1995.


Footnotes

1 Throughout this chapter, current funding or expenditure data are presented in nominal dollars. In keeping with U.S. Government and international standards, R&D trend data usually are deflated to 1987 constant dollars using the Gross Domestic Product implicit price deflator and are so indicated. (See appendix table 4-1.) Since GDP deflators are calculated on an economy-wide rather than R&D-specific basis, their use more accurately reflects an "opportunity cost" criterion, rather than a measure of cost changes in doing research. The constant dollar figures reported here thus should be interpreted as real resources foregone in engaging in R&D rather than in other activities such as consumption or physical investment. Broad-based deflators - such as the GDP deflator - are, however, quite useful in approximating changes in aggregate R&D costs (Jankowski, 1993). They are undoubtedly much less appropriate for calculating real R&D expenditures at a more disaggregated level. Further, comparisons in this chapter of U.S. and international R&D expenditure data are based on reported R&D investments converted to U.S. dollars with purchasing power parity (PPP) exchange rates. (See appendix table 4-2.) Although PPPs are not equivalent to R&D exchange rates per se, they better reflect differences in countries' laboratory costs than do market exchange rates.

2 R&D performed by state and local governments is not included in the national R&D totals. In 1987, R&D performance by these entities was estimated to be less than $1 billion.

3 FFRDCs are organizations exclusively or substantially financed by the Federal Government to meet particular requirements or provide major facilities for research and associated training purposes. Each center is administered by an industrial firm, an individual university, a university consortia, or a nonprofit organization. (See Federally Funded Research and Development Centers in this chapter.)

4 Because of ongoing improvements in NSF's annual Survey of Industrial Research and Development aimed at better coverage of the nonmanufacturing sector, it is not possible to determine how much of the increase in R&D spending in the service sector is real and how much is attributable to better coverage of the sector (Pollak, 1991; SRS, 1994).

5 Some of this increase may simply be a result of changes in the industry R&D survey. See Science Resources Studies Division (1995b).

6 See chapter 5, Academic Research and Development: Infrastructure and Performance, for a discussion of the increasing number of scientific journal articles with industry-university co-authorship.


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