U.S. and International Research and Development: Funds and Alliances
National Trends in R&D Expenditures
Expenditures on research and development (R&D) performed in the United States reached a record-setting high in 1997, exceeding an estimated $200 billion for the first time. In addition, the rate of growth in R&D investment in the mid-1990s was
the highest it has been since the early 1980s, in contrast to a period earlier in the decade when increases in R&D spending failed to keep pace with inflation.
Profit-making companies are responsible for the current upward trend in R&D investment in the United States. The most recent data show industrial firms providing $2 out of every $3 (an estimated $133.3 billion in
1997)-and spending $3 out of every $4 (an estimated $151.4 billion)-invested in R&D in the United States. Both proportions have been edging upward almost continuously for the past quarter century. Increases in the mid-1990s in industrial R&D are the
highest recorded since the early 1980s and are largely attributable to record-setting profits, intense international competition, and the introduction of new capabilities in information technology. In addition, in many firms, external research
funding is growing at a rate faster than internal spending.
The Federal Government, which has been steadily losing ground to industry as a national source of R&D funds, provided an estimated $62.7 billion in R&D support in 1997. Federal R&D funding has fallen almost
continuously in real terms for a decade, although the descent seems to have tapered off in the mid-1990s. In 1997, federal agencies provided 30 percent of all monies spent on R&D in the United States, down from 46 percent a decade earlier (at the
peak of the defense buildup).
The decline in federal R&D funding is reflected in data for each of the R&D-performing sectors-except academia-but is most visible in data showing federal support of industry R&D. In other words, the impact of defense
downsizing on R&D performance can be seen most clearly in the industry-reported R&D numbers. In 1997, federal support of industry-performed R&D was an estimated $20.8 billion, down about $8 billion from 10 years earlier. Between 1987 and 1997, the
federal share of total industry R&D performance declined dramatically-from 32 percent to an unprecedented 14 percent. It should be noted that the federal share of the industry total has been shrinking almost continuously since at least 1970, because
industry's own funding has either outpaced or has not declined as rapidly as federal support.
Academia is the only R&D-performing sector that did not experience a cutback in federal support during the 1990s. The annual rate of growth in federal support, however, has been falling fairly steadily for more than a
decade, e.g., little real growth is expected for 1995-97. The growth-rate decline can be attributed to efforts to balance the budget and reduce the deficit.
All three categories of R&D funding-basic research, applied research, and development-contributed to the overall growth in R&D spending in the United States in the mid-1990s: all three are at their highest levels ever
recorded, in both current and constant dollars. All of the growth, however, took place in the private sector. In terms of R&D financial support, the Federal Government's share of total funding for each of the three categories dropped between 1987
and 1997, with particularly severe declines for applied R&D.
The nonmanufacturing sector now accounts for approximately one-fourth of all industrial R&D investment in the United States; this is considerably greater than in earlier decades. This higher profile is largely
attributable to the growth of the information technology (especially software) and biotechnology industries. Firms in these two categories could seem to be taking over the annual list of the 100 largest R&D-performing companies.
Among the six largest R&D-performing manufacturing industries, companies classified in the electrical equipment industry exhibited both the largest absolute increase ($8.2 billion) and the highest percentage increase (92
percent) in nonfederal R&D expenditures between 1991 and 1995. The additional electrical equipment industry monies appear in the electronic components segment, which accounted for 56 percent of R&D dollars in that industry in 1995 and experienced
a three-fold increase in R&D spending between 1991 and 1995.
Pharmaceutical companies' R&D spending nearly tripled between 1985 and 1995. The most prominent trend in the drugs and medicines industry has been the melding of pharmaceutical and biotechnology research: e.g., more
than one-third of drug companies' R&D projects are primarily biotechnology-related. In addition, the rapid growth of R&D dollars reflects the high cost of research directed at the discovery of cures and treatments for diseases like AIDS, other
viruses, and drug-resistant bacteria.
Total federal R&D obligations were an estimated $68.1 billion in fiscal year 1997, 12 percent below the 1989 level (in real dollars), the peak year of federal R&D investment. Defense downsizing, which affected programs
at both the Departments of Defense (DOD) and Energy, fueled the overall decline.
For the first time since 1981, DOD is expected to account for less than half (48 percent) of the federal R&D total. The DOD share of federal R&D spending has been declining steadily since the mid-1980s. In 1986, at the
height of the defense buildup, it accounted for approximately two-thirds of the total.
Cooperative R&D is now an important tool in the development and leveraging of science and technology (S&T) resources. There has been a major upswing in the number of inter- and intra-sector and international S&T
partnerships since the early 1980s. For example, the annual number of new research joint ventures has been growing in most years, with the largest increases occurring in 1995 and 1996, bringing the total number of these research collaborations up to
665 by the end of 1996.
The increase in research joint ventures may reflect, to some extent, companies' participation in the U.S. Department of Commerce's Advanced Technology Program (ATP). Between 1990 and 1996, more than $2 billion in public and
private funds were invested in 288 ATP projects. ATP funding was cut substantially in 1996.
Technology transfer activities became an important mission component of federal laboratories in the late 1980s. Although more than 3,500 new cooperative research and development agreements (CRADAs) were executed
between 1992 and 1995, government agencies now seem to be backing away from these collaborative research arrangements. The U.S. Council on Automotive Research-better known as the Clean Car Agreement or the Partnership for a New Generation of
Vehicles-executed 32 CRADAs in 1995.
The elimination in 1995 of the Technology Reinvestment Project affected DOD's "dual-use" strategy of providing financial support to the private sector to develop and deploy those technologies with likely applications in
both the commercial and military sectors. This project was replaced in 1997 by the much smaller Dual-Use Applications Program.
International Trends in R&D Expenditures
- The United States accounts for roughly 44 percent of the industrial world's R&D investment total and continues to outdistance, by more than 2 to 1, the total research investments made by Japan, the second largest
performer. Not only did the United States spend more money on R&D activities in 1995 than any other country, it also spent nearly as much by itself as the rest of the major industrialized "Group of Seven" (G-7) countries combined-Japan, Germany,
France, the United Kingdom, Italy, and Canada. However, in terms of nondefense R&D spending, combined expenditures in these six countries exceeded nondefense R&D spending in the United States by 18 percent.
Total R&D expenditures stagnated or declined in each of the largest R&D-performing countries in the early 1990s, but has since recovered in the United States and Japan. There was a worldwide slowing in R&D spending in
both large and small industrialized countries in the early 1990s. In fact, inflation-adjusted R&D spending fell for three consecutive years (1992, 1993, and 1994) in both the United States and Japan. Among the G-7 countries, only the United States
and Japan showed an apparent reversal of this trend in 1995, with the total R&D effort rising by 6 percent in both countries (in constant dollars and constant yen, respectively).
In the United States, the recovery in total R&D spending and its R&D to gross domestic product (GDP) ratio is the result of increased expenditures on nondefense activities. The U.S. R&D/GDP ratio has inched back up to
2.6 percent in 1997 from its 16-year low of 2.4 percent in 1994. The 1997 nondefense R&D/GDP ratio is estimated at 2.2 percent, a historical high.
R&D spending in the Russian Federation and in many of the former communist countries in Europe remains considerably below levels in place before the introduction of market economies. R&D downsizing and restructuring of
obsolete, state-owned (generally military-oriented) enterprises are necessary to establish viable commercial and scientific R&D infrastructures in these countries.
Worldwide changes in the R&D landscape are presenting governments with unparalleled issues of refocusing purpose and direction in S&T policies. Defense R&D has been substantially reduced not only in the United States,
but also in the United Kingdom and France, where the national defense share of the government R&D total has declined from 44 to 41 percent, and from 40 to 29 percent, respectively.
Among nondefense functions, U.S. Government R&D spending for health is far greater than for any other activity. From 1990 to 1998, health R&D is expected to grow by 26 percent (in constant dollars) while funding for
all other nondefense functions will grow by just 3 percent. Health programs now account for 18 percent of the U.S. federal R&D funding total. The greatest growth is in AIDS-related research.
Many countries have put into place fiscal incentives to increase the overall level of R&D spending and to stimulate industrial innovation. Practically all industrialized countries (including the United States) allow
industry R&D expenditures to be 100 percent expensed in the year they are incurred, and about half of the countries (including the United States) provide some type of additional R&D tax credit. From 1990 to 1996, U.S. industry received an estimated
$12 billion through tax credits on incremental research and experimentation expenditures. About 15 states offer additional R&D tax credits.
Industrial firms increasingly are using global research partnerships to strengthen core competencies and expand into technology fields critical for maintaining market share. Since 1986, companies worldwide have entered
into over 4,000 known multi-firm R&D alliances involving strategic high-technology activities. More than one-third of these alliances were between U.S. firms and European or Japanese firms. Most of the alliances were created to develop and share
Substantial R&D investments are made by U.S. companies overseas. From 1985 to 1995, U.S. firms' investment in overseas R&D increased three times faster than did company-funded R&D performed domestically (10.1 percent
versus 3.4 percent average annual constant-dollar growth). Equivalent to about 6 percent of industry's domestic R&D funding in 1985, overseas R&D now amounts to 12 percent of U.S. industry's on-shore R&D expenditures. Most (72 percent) of U.S.-funded
R&D was performed in Europe-primarily Germany, the United Kingdom, and France. Pharmaceutical companies accounted for the largest industry share (20 percent of U.S. 1995 overseas R&D), which was equivalent to 25 percent of their domestically financed
Substantial R&D investments are made by foreign firms in the United States. From 1987 to 1995, inflation-adjusted R&D growth from majority-owned U.S. affiliates of foreign firms averaged 12.5 percent per year. This
growth contrasts favorably with the implied 3 percent average annual rate of increase in U.S. firms' domestic R&D funding. R&D expenditures in the United States by foreign companies are now roughly equivalent to U.S. companies' R&D investment abroad.
Germany, Switzerland, the United Kingdom, France, and Japan collectively account for 75 percent of this foreign funding. Foreign-funded research in 1995 was concentrated in drugs and medicines, industrial chemicals, and electrical equipment
industries. More than 670 foreign-owned R&D facilities are located in the United States.
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