R&D investment in the United States hit a record-setting high in 1997, reaching an estimated $205.7 billion. Total R&D expenditures climbed an average of 4.3 percent per year (in inflation-adjusted dollars) between 1994 and 1997, the highest rate of growth recorded since the early 1980s. In addition, R&D as a percentage of GDP has also been rising. The recent expansion in R&D investment marks a change from the late 1980s and early 1990s when there was relatively little or no real growth in overall R&D spending. (See figure 4-1 and appendix tables 4-3 and 4-4.)
The two major sources of financial support for R&D are industry and the Federal Government, which together supply approximately 95 percent of all funds spent on R&D performed in the United States. The remaining 5 percent is provided primarily by universities and colleges and nonprofit organizations. (See figures 4-1 and 4-2 and appendix table 4-5.)
In addition to financing R&D, industry and the Federal Government are two of the three leading R&D-performing sectors. The third is academia, which is a distant second to industry in terms of R&D performance. In 1997, industry, academia, and the Federal Government were responsible for spending 74 percent, 12 percent, and 8 percent, respectively, of the total dollars invested in R&D in the United States. Two other groups-federally funded research and development centers (FFRDCs) and nonprofit organizations-accounted for 4 percent and almost 3 percent, respectively. (See figure 4-2 and appendix table 4-3.)
Industry's share of national R&D performance has been rising steadily-from two-thirds of the total in the 1970s to nearly three-fourths in the late 1990s. During the same period (1970-97), the academic share rose slightly-from 9-10 percent to 12-13 percent-and the federal share dropped by half-from 16 percent to 8 percent.
For-profit companies are responsible for the current upswing in R&D investment in the United States. In addition to being both the largest source of R&D funds and the leading R&D-performing sector in the United States, industry also had the highest percentage increase in R&D investment in the mid-1990s.
In 1997, companies provided an estimated $133.3 billion to finance R&D performed in the United States, or 65 percent of the national total. Nearly all of this amount-$130.6 billion-was spent on R&D conducted in industrial facilities; the remaining $2.7 billion was used to support R&D activities undertaken on university and college campuses and at other nonprofit organizations. (See appendix table 4-5 and text table 4-1.)
Industry-Supplied Funding on the Rise. In 1980, industry surpassed the Federal Government as the leading supplier of R&D dollars in the United States. (See figure 4-1.) During the early and mid-1980s, industry's share of the total stood at about 50 percent. Then, in 1987, the proportion of total industry-supplied R&D monies began an almost continuous decade-long climb, with the most recent data showing industrial firms providing $2 out of every $3 spent on R&D in the United States. (See figure 4-3.)
Between 1995 and 1997, industry R&D financing grew at an estimated average annual rate of 7.7 percent per year in inflation-adjusted dollars. This trend contrasts with that of the preceding three-year period 1991-94, when no real growth occurred in industry-supplied R&D dollars.
Federal R&D Funding in Decline. While industry's share of the national total was expanding, the federal share was shrinking. In 1997, the Federal Government provided an estimated $62.7 billion in R&D support, with federal agencies providing 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). (See figure 4-3.) Federal R&D funding declined almost continuously in real terms between 1987 and 1997 at an average annual rate of 2.3 percent; the greatest drop occurred during the late 1980s and early 1990s. The descent seems to be tapering off, however, as the annual average decline was estimated to be only 1.3 percent between 1994 and 1997.
Most federal R&D dollars (74 percent) are not used in government-owned laboratories, but rather to finance R&D performed in other sectors. (See figure 4-4 and appendix table 4-5.) For example:
Declining Federal Support Felt Most by Industry. The decline in overall 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 R&D performed by industry. During the period 1992-97, federal R&D funds supplied to industry are expected to show an average annual decline of 3.8 percent in constant 1992 dollars. Cutbacks in federal intramural and federal support to nonprofit organizations are expected to average 1.7 percent, and to all FFRDCs, 2.5 percent in constant 1992 dollars.
In 1987, federal R&D funds accounted for just under one-third of all monies spent by companies to conduct R&D. The most recent data show the shrinking of that proportion down 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.) Although defense downsizing seems to have taken a heavy toll on industry R&D, it is becoming increasingly difficult to track defense R&D flows from federal agencies to industry performers. (See "Accounting for Defense R&D: Discrepancies Between Performer-and Source-Reported Expenditures.")
The curtailment of federal R&D work has had a definite negative effect on overall industrial R&D performance numbers since 1987. That is, the estimated 6.1 percent average annual decline in federal R&D support in constant dollars registered between 1987 and 1997 partially offset growth in industry's own funding during the 10-year period. In 1997, federal support of industry-performed R&D was an estimated $20.8 billion, down about $8 billion from the level reported 10 years earlier. (See figure 4-5 and appendix table 4-3.)
Annual Growth Rate Slowed for Academia. It is important to emphasize that the annual level of federal R&D support to academia has not declined. However, the annual rate of growth in federal support has been falling fairly steadily (in all but two of the past dozen years). The growth rate decline can be attributed to efforts to balance the budget and reduce the deficit. Although academia is the only R&D-performing sector not to have experienced a cutback in federal support during the 1990s, little real growth is expected for 1995-97. While the annual level of total R&D support supplied by each of the five sources that fund academic R&D rose in both current and constant dollars (see appendix tables 4-3 and 4-4), all the sources exhibited 1992-97 growth rates that were about half or less than half of those recorded for the previous five-year period.
Despite the recent slowing, federal support to universities and colleges is estimated to have increased at an average annual constant-dollar rate of 2.3 percent between 1992 and 1997. Industrial support is estimated to have had the largest percentage increase during that period (32 percent), but federal agencies registered the largest absolute increase ($3 billion) in support of academic R&D.
Industry. In the United States, industry has always been the overwhelming leader in R&D performance. In 1997, three-fourths of the total amount spent on R&D performed in the United States financed work undertaken in industrial laboratories. The total cost of that work is estimated at more than $150 billion; federal agencies supplied approximately 14 percent of those funds. (See appendix table 4-3.)
A surge in industrial R&D performance during the mid-1990s saw annual expenditure increases estimated at 6.2 percent per year in inflation-adjusted dollars between 1994 and 1997-the highest rate recorded since the early 1980s. The expansion is entirely attributable to companies' own R&D investment and represents a turnaround from the preceding three-year period when the annual level of industrial R&D outlays failed to keep pace with inflation. (See figure 4-6 and appendix tables 4-3 and 4-4.)
Academia. Academia is a distant second to industry in terms of R&D performance, with total expenditures amounting to an estimated $24 billion, or 12 percent of the national total. Until 1989, the academic sector ranked third in total R&D performance in the United States, after industry and the Federal Government. Since 1983, however, the annual rate of increase in R&D performed at universities and colleges has been higher than that of the Federal Government (except in 1995). As a result, academic institutions moved into second place in 1989, behind industry. (See figure 4-6 and appendix table 4-3.)
Academia has not suffered a constant-dollar decline in R&D performance in more than two decades. (See appendix table 4-4.) However, the annual real rate of growth has been decreasing almost continuously since 1986, falling from a near 10 percent increase that year to an estimated 1 percent change in both 1996 and 1997.
Most of the research performed on university and college campuses is funded by the Federal Government. In 1997, federal agencies provided an estimated $14.3 billion, or about 60 percent of the total. Academic institutions supplied an estimated $4.5 billion of their own funds, state and local governments and nonprofit organizations each contributed $1.8 billion, and industry provided $1.7 billion.
Federal R&D support to academia has been increasing continuously since 1982, even after adjustment for inflation. Although industry supplies fewer R&D dollars to universities and colleges compared to the other four sources, it has an even longer track record than the Federal Government of continuous growth in the support of academic research-stretching back to at least 1970. As a result, the proportion of academic R&D expenditures supplied by industry has been rising fairly steadily, although industry still represents only a fraction (7 percent) of total academic R&D support.
Federal Agencies. Federal entities spent an estimated $16.5 billion on intramural R&D in 1997. (Most federal R&D monies are not spent in federally run facilities, but in other sectors.) Federal intramural R&D, as a percentage of total national R&D performance, has been falling fairly steadily since the early 1970s and was down to an estimated 8 percent in 1997.
In real terms, federal intramural R&D is at its lowest point since 1982 because of cutbacks in DOD laboratories; these labs accounted for 56 percent of the intramural total in 1982, but less than half (48 percent) in 1997. The most recent data show an estimated constant-dollar decline of 9 percent between 1995 and 1997. (See figure 4-6 and appendix table 4-4.)
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 depict innovation occurring in a straight-line progression through three stages: (1) scientific breakthroughs from the performance of basic research (2) lead to applied research, which (3) leads to development or application of applied research to commercial products, processes, and services. [Skip Text Box]
The National Science Foundation uses the following definitions in its resource surveys. They have been in place for several decades and are also generally consistent with international definitions.
Basic research. The objective of basic research is to gain more comprehensive knowledge or understanding of the subject under study, without specific applications in mind. In industry, basic research is defined as research that advances scientific knowledge but does not have specific immediate commercial objectives, although it may be in fields of present or potential commercial interest.
Applied research. Applied research is aimed at gaining the knowledge or understanding to meet a specific, recognized need. In industry, applied research includes investigations oriented to discovering new scientific knowledge that has specific commercial objectives with respect to products, processes, or services.
Development. Development is the systematic use of the knowledge or understanding gained from research directed toward the production of useful materials, devices, systems, or methods, including the design and development of prototypes and processes.
Budget authority. Budget authority is the authority provided by federal law to incur financial obligations that will result in outlays.
Obligations. Federal obligations represent the amounts for orders placed, contracts awarded, services received, and similar transactions during a given period, regardless of when funds were appropriated or payment required.
Outlays. Federal outlays represent the amounts for checks issued and cash payments made during a given period, regardless of when funds were appropriated or obligated.
R&D plant. Federal obligations for R&D plant include the acquisition of, construction of, major repairs to, or alterations in structures, works, equipment, facilities, or land for use in R&D activities at federal or nonfederal installations.
The simplicity of this approach makes it appealing to policymakers, even though the traditional categories of basic research, applied research, and development do not always ideally describe the complexity of the relationship between science, technology, and innovation in the real world.
Alternative and perhaps more realistic models of the innovation process have been developed, but they are probably too complicated to be used in collecting and analyzing comparable and reliable data for policymaking purposes, and would not enable time-series analyses. Therefore, the practice of categorizing R&D expenditures into basic research, applied research, and development is unlikely to be abandoned anytime soon.
All three categories of R&D funding contributed to the overall growth in R&D spending in the United States in the mid-1990s, and all three were at their highest levels ever recorded in both current and constant dollars. (See figure 4-7.) All of the gains, however, took place in the private sector. In terms of R&D financial support, the Federal Government's share of total funding for applied research and development dropped dramatically between 1987 and 1997. For applied research, the proportion declined from 38 to 29 percent. The development loss was even more steep, falling from 46 percent of the total to 25 percent. The Federal Government's share of basic research funding also fell during the same 10-year period-from 61 percent of the total to 57 percent. (See figure 4-8.)
Most R&D dollars-an estimated $128.3 billion in 1997, or 62 percent of the total-are spent on development. Applied research accounted for an estimated 22.5 percent, and basic research for 15 percent. These proportions tend to be fairly stable over time, although percentage point changes usually occur from year to year. For example, basic research's proportion of total R&D varied from 13 to 17 percent during the last quarter century, while applied research and development ranged from 22 to 24 percent, and from 60 to 65 percent, respectively. In the mid-1990s, development increased a couple of percentage points, and basic research fell by about the same amount-probably a reflection of the expanding role of industry in national R&D performance. Industry performs relatively more development and less basic research than the other sectors.
In 1997, an estimated $31.2 billion was spent on basic research performed in the United States, an increase of about 4 percent in real terms over the 1995 level, and somewhat below the overall R&D increase of 7 percent during the two-year period. Most of that amount-$17.7 billion, or 57 percent of the total-was supplied by the Federal Government. Industrial firms provided $8 billion, or 25 percent of the total; universities and colleges, $2.7 billion; and nonprofit organizations, $1.7 billion.5 (See figure 4-7 and appendix table 4-9.)
Academic Sector Performance. 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 $16 billion in 1997. Of that amount, $10 billion were federal funds. Far smaller amounts were supplied by the uniersities themselves, and by state and local governments, industry, and nonprofit organizations. (See appendix table 4-7.)
Financial support for basic research performed in the academic sector is not growing as fast as it did in the late 1980s and early 1990s. The average annual constant-dollar rate of growth was an estimated 2.3 percent between 1992 and 1997, down from the 4.4 percent average registered during the preceding five-year period. All five funding sources contributed to the slowdown, each exhibiting a lower rate during the period 1992-97 than during 1987-92. The drop is particularly noticeable in the largest source of funding-the Federal Government. It is estimated that between 1995 and 1997, federal funding of basic research performed in the academic sector barely kept pace with inflation. (See appendix table 4-10.)
Industry's support of research conducted on university and college campuses has always been a small but growing component of the academic research portfolio. Industry officials have tapped this resource not only to realize the beneficial results of the research they sponsor, but also to capitalize on opportunities to train future scientists and engineers, most of whom will one day be working in their laboratories. Industrial support can take a number of forms, including hiring professors as consultants, funding postdoctoral joint research, and/or providing grants to individual departments (Council on Competitiveness 1996). Although only a small fraction of academic basic research is financed by industry-an estimated 6.5 percent in 1997-companies' support increased an estimated 8 percent in real terms between 1995 and 1997, the largest percentage gain of the five sources that fund academic basic research.
Increasing use is being made of university research to fill gaps left when industrial basic research is curtailed, e.g., industry and university personnel have been collaborating in areas of military importance, including lasers, electronics, computing, and materials (U.S. DOD 1996). Results from an annual Industrial Research Institute survey confirm that "industry is depending more and more on academic research," e.g., the percentage of respondents anticipating increasing grants for academic R&D rose from 12 percent in 1993 to more than 20 percent in 1996 and 1998 (IRI 1997).
Industrial Performance. Industrial firms spent an estimated $6.6 billion in company and federal funds on basic research in 1997-about 4 percent of all industrial R&D expenditures. The vast majority of these funds were companies' own financial resources, which increased an estimated 14.5 percent in real terms between 1995 and 1997. (See appendix tables 4-7 and 4-8.)
The gain in industrial investment in basic research estimated for 1995-97 partially offsets a 20 percent decline that took place during the preceding four-year period when several companies' central research facilities were dismantled. That period marked the beginning of a trend toward shorter term R&D and away from fundamental research, largely "driven by the competitive environment and a motivation to extract greater value (or 'effectiveness') from R&D investments" (Larson 1997b). (See "Top 10 'Biggest' Problems for Technology Leaders.") R&D is increasingly being conducted within individual business units in a concerted effort to speed commercialization of new technology. Company research is being "driven largely by business needs rather than curiosity" (Larson 1997b). [Skip Text Box]
The Industrial Research Institute has been surveying its membership annually since 1993 to identify the biggest problems for technology leaders. (See text table 4-2.) Results from the 1997 survey rank "managing R&D for business growth" first; this issue has increased in relative importance to the Institute's members, who ranked it fourth and fifth in 1996 and 1995, respectively. "Balancing long-term/short-term R&D objectives/focus" was identified as the second most important problem every year of the survey except 1996 (where it ranked first) and 1993 (third). "Integration of technology planning with business strategy" ranked third in three of the five years. The only item evidencing a noticeable decline in relative importance over the five-year period was "measuring and improving R&D productivity/effectiveness." Until 1996, this item was ranked first in importance; in 1996, it fell to second; and in 1997, it was ranked seventh out of the 10 problem areas.
In some companies, corporate support for "central research" activity has been eliminated completely. Allied Signal, Armstrong World Industries, and W.R. Grace are recent examples (Larson 1997b). A survey of leading firms found that central corporate funding accounted for about 50 percent of central laboratories' budgets in 1988, but had fallen to about 40 percent in 1993, and that the percentage of corporate funding in the budgets of business unit laboratories decreased from almost 40 percent to less than 10 percent during the same period (Bean 1995). According to another study, increases in outlays for applied research and development have occurred at the expense of basic research (Cahners 1997).
Federal Intramural Performance. An estimated $2.7 billion was used to finance basic research performed in federally run laboratories in 1997. The annual level of funding has not changed appreciably in real terms since the early 1980s. (See appendix table 4-8.) In addition, basic research as a percentage of total federal intramural research has held constant (at 15 to 16 percent) for the past two decades, indicating that applied research and development-not basic research-have felt the brunt of the general overall decline in federal intramural research.
An estimated $46.2 billion was spent on applied research performed in the United States in 1997-22.5 percent of the national R&D total. The annual level of investment in applied research increased an estimated 17 percent in real terms between 1994 and 1997, more than offsetting a brief 12 percent downward slide that occurred during the preceding three-year period. (See figure 4-7 and appendix table 4-12.)
Industry, which led the growth in investment in applied research in the mid-1990s, is both the leading supporter and performer of this type of research. (See figure 4-7 and appendix table 4-13.) In 1997, companies were the source of an estimated $29.4 billion spent on applied research undertaken in the United States, up 36 percent in real terms over the 1994 level. In general, the proportion of all applied research funds originating in industry has been increasing steadily-up from 42 percent of the national total in 1970 to 64 percent estimated for 1997. Industry's performance of applied research was at an all-time high in 1997, an estimated $31.7 billion (in current dollars), or 69 percent of the national total.
The industrial increase in applied research performance is noteworthy on two counts. First, it represents a major turnaround from the early 1990s when, between 1991 and 1994, the annual number of dollars invested in applied research conducted in industrial laboratories dropped more than $1 billion per year. Second, it is entirely attributable to companies' own investment. After a series of hefty increases in federal funding of industry-performed applied research in the early 1980s, the level fell each year between 1985 and 1988, recovering in the late 1980s only to decline again in the 1990s. In 1997, federal support of industry-performed applied research was just over half the level recorded seven years earlier. (See appendix table 4-11.)
While industry financing of applied research was recovering from an early 1990s slump, federal funding continued to slide downward, falling an estimated 12 percent in real terms between 1993 and 1997. The Federal Government's share of the total has been declining since 1970, falling from 54 percent that year to an estimated 29 percent in 1997. The decline was particularly steep during the recent period 1994-97, with a drop of 9 percentage points.
Between 1994 and 1997, a major disparity marked trends occurring among the three leading R&D-performing sectors. While the annual level of spending on applied research undertaken in industrial laboratories rose a healthy 28 percent in constant 1992 dollars, the amount spent by academic institutions increased by a modest 5 percent, and the Federal Government's intramural performance was off by about 6 percent. (See appendix table 4-12.)
The annual level of federal investment in intramural applied research held steady in the mid-1990s at approximately $5 billion; therefore, only a slight reduction in real dollars took place between 1994 and 1997. In contrast, during the preceding six-year period, federal intramural applied research outlays increased an average of 3.4 percent per year in constant dollars. (See appendix tables 4-11 and 4-12.)
Six out of every 10 dollars spent on R&D in the United States are spent on development. (See figure 4-7 and appendix tables 4-3 and 4-15.) An estimated $128.3 billion was used to finance the development of new and improved products, processes, and services in 1997. This amount exceeds the 1995 level by about 8 percent, after adjustment for inflation. Development funding has been increasing in real terms since 1993, offsetting sluggish growth in the late 1980s and a brief downward trend in the early 1990s which reflected defense spending cutbacks following the end of the Cold War. Federal support of development projects has been falling in real terms since 1987 at an average annual rate of 4.5 percent, although the rate of decline slowed in the most recent years. In contrast, industry financing increased 5.1 percent per year during the decade. (See appendix table 4-18.)
As with 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 that year. Because the advancing and applying of new technologies are activities undertaken almost exclusively in the private, for-profit sector, almost all development dollars (nearly 90 percent) are spent by industrial firms. In 1997, industrial firms were the source of an estimated $95.9 billion, or about 75 percent, of the total spent on development in the United States. All but $313 million of these funds were spent in industrial laboratories. The federally provided share of development funds is now estimated to be 25 percent of the total, down from more than 40 percent during the late 1970s and 1980s. (See figure 4-8 and appendix table 4-17.)
Of the estimated $113 billion spent by industry on development in 1997, an estimated $17. billion, or 15 percent of the total, came from federal contracts. Since 1987, a major curtailment in the annual level of federal funding was reported by industry, with a 27 percent (47 percent after adjustment for inflation) drop being registered between 1987 and 1997. (See appendix tables 4-15 and 4-16.) The most recent data show the other R&D-performing sectors-including the Federal Government, universities and colleges, nonprofit organizations, and FFRDCs-responsible for spending only 12 percent of the national total.
As development R&D performers, federal agencies spent an estimated $8.7 billion in 1997, placing the Federal Government a distant second to industry in terms of development performance. The most recent data show the annual level at about $1 billion below the 1990 level. In real terms, federal intramural performance of development fell at an average annual rate of 3.7 percent between 1989 and 1997.