Absolute levels of R&D expenditures are indicators of the breadth and scope of a nation's S&T activities. The relative strength of a particular country's R&D effort is further indicated through comparison with other major industrialized countries. This section provides such comparisons of international R&D spending patterns. It examines absolute and relative expenditure trends, contrasts performer and source structural patterns, reviews the foci of R&D activities, and looks at government priorities and policies. While R&D performance patterns by sector are quite similar across countries, national sources of support differ considerably. Foreign sources of R&D have been increasing in practically all countries.
U.S. leadership in terms of financial investment in R&D compared to other countries' remains largely unchanged from a decade ago, with the U.S. R&D total nearly equal to that of the next six largest performers combined. Virtually all of the major R&D-performing countries experienced a slowing in the growth of R&D funds in the early 1990s, and most continue to feel the funding pinch. The United States and Japan may be exceptions, each reporting significant increases in R&D activity for 1995.
Worldwide Distribution of R&D. The worldwide distribution of R&D performance is concentrated in several industrialized nations. Of the approximately $410 billion in 1995 R&D expenditures estimated for the 28 Organisation for Economic Co-operation and Development (OECD) countries, 90 percent is expended in just seven (OECD 1997a). These estimates are based on reported R&D investments (for both defense and civilian projects) converted to U.S. dollars with purchasing power parity (PPP) exchange rates. (See appendix table 4-2.) Although PPPs technically are not equivalent to R&D exchange rates, they better reflect differences in countries' laboratory costs than do market exchange rates (MERs). (See "Purchasing Power Parities: Preferred Exchange Rates for Converting International R&D Data.") [Skip Text Box]
Comparisons of international statistics on R&D are hampered by the fact that countries' R&D expenditures are denominated, obviously, in their home currencies. Two approaches are commonly used to normalize the data and facilitate aggregate R&D comparisons. The first method is to divide R&D by GDP, which results in indicators of relative effort according to total economic activity. The second method is to convert all foreign-denominated expenditures to a single currency, which results in indicators of absolute effort. The first method is a straightforward calculation, but permits only gross national comparisons. The second method permits absolute-level comparisons and analyses of countries' sector- and field-specific R&D investments, but entails first choosing an appropriate currency conversion series.
Because, for all practical purposes, there are no widely accepted R&D-specific exchange rates, the choice is between market exchange rates and purchasing power parities. These are the only series consistently compiled and available for a large number of countries over an extended period of time.
At their best, MERs represent the relative value of currencies for goods and services that are traded across borders; that is, MERs measure a currency's relative international buying power. But sizable portions of most countries' economies do not engage in international activity, and major fluctuations in MERs greatly reduce their statistical utility. MERs also are vulnerable to a number of distortionse.g., currency speculation, political events such as wars or boycotts, and official currency intervention-that have little or nothing to do with changes in the relative prices of internationally traded goods.
For these reasons, an alternative currency conversion seriesPPPshas been developed (Ward 1985). PPPs take into account the cost differences across countries of buying a similar basket of goods and services in numerous expenditure categories, including nontradables. The PPP basket is therefore representative of total GDP across countries. When applied to current R&D expenditures of other major performersJapan and Germanythe result is the same: PPPs result in a substantially lower estimate of total research spending than do MERs, as shown in figure 4-18. For example, Japan's R&D in 1995 totaled $76 billion based on PPPs and $142 billion based on MERs. German R&D was $38 billion and $55 billion, respectively. U.S. R&D was $183 billion in 1995.
PPPs are the preferred international standard for calculating cross-country R&D comparisons and are used in all official OECD R&D tabulations. Although there is considerable difference in what is included in GDP-based PPP items and R&D expenditure items, the major components of R&D costs-fixed assets and the wages of scientists, engineers, and support personnel-are more suitable to a domestic converter than to one based on foreign trade flows. Exchange rate movements bear little relationship to changes in the cost of domestically performed R&D. This point is clearly displayed in figure 4-18 (B) and (C). When annual changes in Japan's and Germany's R&D expenditures are converted to U.S. dollars with PPPs, they move in tandem with such funding denominated in their home currencies. Changes in dollar-denominated R&D expenditures converted with MERs exhibit wild fluctuations unrelated to the R&D purchasing power of those investments. MER calculations indicate that, between 1982 and 1995, German and Japanese R&D expenditures each increased in three separate years by 20 percent or more. In reality, nominal R&D growth never exceeded 14 percent in either country during this period.
Worse, MER calculations often result in the wrong direction of implied R&D change. Japan reported reductions in nominal yen R&D in 1993 and 1994, but the use of MERs resulted in positive growth rates of 12 and 8 percent, respectively. PPP-denominated R&D was appropriately negative and flat those two years. Conversely, Japan's MER-denominated R&D expenditures declined in 1982, as did Germany's in 1983, 1984, 1989, and 1993. Yet the home currency-denominated R&D expenditures showed positive changes in each of those years. The use of MERs here is obviously inappropriate: PPP calculations result in generally positive annual R&D expenditure changes that are always considerably closer to the countries' actual funding patterns.
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 research investments made in Japan, the second largest R&D-performing country. Not only did the United States spend more money on R&D activities in 1995 than any other country, but it also spent almost 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. (See appendix table 4-42.) In only four other countriesthe Netherlands, Australia, Sweden, and Spaindo R&D expenditures exceed 1 percent of the OECD R&D total (OECD 1997a).
Worldwide Slowing of R&D Spending. In 1985, spending in non-U.S. G-7 countries was equivalent to 91 percent of U.S. R&D expenditures that year, climbing steadily to peak at 107 percent of the U.S. total in 1992. A worldwide slowing in R&D performance-more pronounced in other countries than in the United States-lowered 1995 R&D spending in these six countries to 101 percent of the U.S. total. (See figure 4-19.)
Total R&D expenditures stagnated or declined in each of the largest R&D-performing countries in the early 1990s. (See figure 4-20.) Indeed, for more than a decade, these G-7 countries have displayed similar aggregate R&D trends: substantial inflation-adjusted R&D growth in the early 1980s, followed by a general tapering off in the late 1980s, then leveling off or declining real R&D expenditures into the 1990s. For most of these countries, economic recessions and general budgetary constraints slowed both industrial and government sources of R&D support; these factors contributed to the major reversal of positive R&D trends in the United States and Japan, where inflation-adjusted R&D spending declined for three consecutive years beginning in 1992. The same general pattern is true for the United Kingdom and Italy, where real growth in the 1980s gave way to declining R&D expenditures, taking into account overall inflation. Unlike in the United States and Japan, however, R&D spending in these countries has not recovered to previous levels.
Government Cutbacks in Defense-Related R&D. Additionally, changes in the world's geopolitical climate have led to cutbacks in government support for defense-related R&D. Such reductions, in turn, have slowed reported national R&D growth patterns in some countries, most notably in the United States, the United Kingdom, and France. For Germany, the integration of the former East German S&T system into the S&T system of West Germany's market economy resulted in an apparent jump in the nation's R&D effort in 1991; it has since been scaled back as a result of the restructuring and closing of inefficient, inappropriate, and redundant research institutions (Government of the Federal Republic of Germany 1993). To date, up to one-third of all former East Germany's R&D institutions have been closed.
Decreased Ratios in G-7 Countries. The drop in Germany's total R&D effort is indicated by recent trends in its R&D/GDP ratio, one of the most widely used indicators of a country's commitment to growth in scientific knowledge and technology development. (See figure 4-21.) In Germany, the ratio has fallen from 2.9 percent at the end of the 1980s, before reunification, to its current level of 2.3 percent. This pattern is not, however, restricted to Germany. In fact, the latest R&D/GDP ratio in each of the G-7 countries is no higher now than it was at the start of the 1990s. For example, in the United Kingdom and France, R&D/GDP ratios appear to have drifted back from recent peaks to 2.1 and 2.3 percent, respectively. In Italy and Canada, which also have faced economic and budgetary constraints, the R&D/GDP ratios leveled off at about 1.1 percent and 1.6 percent, respectively.
In the United States, R&D's share of GDP similarly declined from 2.7 percent in 1991 to an estimated 2.4 percent in 1994, before climbing back to an estimated 2.6 percent in 1997. As detailed earlier in the chapter, most of the increase in R&D is due to increased support in the industrial sector, primarily by electrical equipment and transportation equipment companies. (See "Industrial Research and Development.") Similarly in Japan, the R&D/GDP ratio fell from 2.9 percent in 1990 to 2.6 percent in 1994, before rising to 2.8 percent in 1995. Both industry and government were responsible for renewed vigor in Japan's R&D spending, with Japan's 1996 Science & Technology Plan suggesting a doubling (in constant yen) of the government's R&D investment by the year 2000 (NSF 1997d).
Severe R&D Downsizing Also in Smaller Countries. The likely reversal of funding trends in the United States and Japan notwithstanding, the recent slowdown in R&D spending has not been confined to OECD's largest industrialized countries. R&D growth during the 1990s in many of the smaller or less technologically advanced European countries has been slower than the growth reported for the 1980s. This is particularly true among Eastern European countries and the former Soviet Union, where market economy transitions have necessitated severe market and industrial adjustments, accompanied by even more severe downsizing of R&D activities (European Commission 1994).
The R&D/GDP ratios shown for Russia and several of the former communist states (see figure 4-22) clearly show the overall decline in those countries' indigenous R&D capabilities since the collapse of the Soviet Union. More recent efforts to stabilize the R&D infrastructure are also apparent in the figure. Poland, Hungary, and the Russian Federation each expend roughly 0.75 percent of GDP on R&D activities; for the Czech Republic, the R&D/GDP ratio was about 1.2 percent in 1995.
Notably, whether the overall economy has been growing strongly (as in Poland), modestly (as in Hungary and the Czech Republic), or poorly (as in Russia), R&D expenditures have fallen as a share of GDP. Although these governments appear strongly motivated to make institutional changes that foster private sector S&T investments, total R&D expenditures continue to falter. This circumstance is partly explained by looking at the composition of industrial activity in these countries. The more successful examples of private sector growth occur in industrial sectors where small businesses often perform better than larger state-owned enterprises (OECD 1996b). Yet such firms seldom have access to resources on a scale large enough to permit heavy R&D investments. Conversely, the larger state-owned enterprises have been more concerned with needed restructuring and downsizing than with expanding their R&D expenditures.
Effects on R&D of Russia's Economic Restructuring. As recently as 1990, R&D accounted for about 2 percent of the USSR's GDP, with about 40 percent of that amount expended on defense-related activities (Gohkberg, Peck, and Gacs 1997).44 Indeed, the most advanced aspects of Soviet R&D efforts were undertaken in state-owned enterprises devoted to national security; much of the remaining R&D was performed in other large public industrial institutions in applied research fields that overlapped defense concerns. Most of the basic research was and continues to be in engineering fields.
The introduction of a market economy to Russia brought about drastic economic restructuring that saw a sharp fall in the dominance of state-owned enterprises as well as shrinkage in real GDP, down 38 percent from 1991 to 1995. These trends, in turn, brought about major R&D downsizing, with real R&D expenditures in 1995 less than one-fifth of 1990 levels and with an R&D/GDP ratio of about 0.7 percent. Reflecting the lack of core budgets, entire research institutes have been closed-including many well-equipped laboratories of the former military-industrial complexand an estimated 43 percent of all researchers from 1990 to 1994 left their government R&D laboratories for the commercial sector or retirement or for other reasons, including emigration.
Defense now accounts for about 26 percent of Russia's total R&D, a share comparable to that in the United States. According to statistics released by the Russian Ministry of Science and Technological Policy, overall government R&D budget appropriations now represent about 0.74 percent of GDP, three-fifths of which goes for civilian R&D. In 1991, the comparable figures were 1.85 percent of GDP, one-half of which was civil (CSRS 1997). In real terms, the Russian government's 1994 R&D financing was only one-fourth of that in 1991. As a consequence, business enterprise financing has become increasingly important in the Russian Federation, as has R&D funding from foreign research centers, commercial companies, and international organizations.
The policy focus of many governments on economic competitiveness and commercialization of research results has shifted attention from nations' total R&D activities to nondefense R&D expenditures as indicators of scientific and technological strength. Indeed, conclusions drawn about a country's relative standing may differ dramatically depending on whether total R&D expenditures are considered or whether defense-related expenditures are excluded from the totals. In absolute dollar terms, the U.S. international nondefense R&D position is still considerably more favorable than that of its foreign counterparts, but not nearly as dominant as when total R&D expenditures are compared. U.S. civil R&D remains twice that of Japan's, but the non-U.S. G-7 countries' combined total is 18 percent more than nondefense R&D expenditures in the United States alone.
Between 1982 and 1990, growth in U.S. nondefense R&D spending was fairly similar to growth in other industrial countries, save Japan, whose nondefense R&D expenditure growth was notably faster. Thus, as an equivalent percentage of the U.S. nondefense R&D total, comparable Japanese spending jumped from 45 percent in 1982 to 55 percent in 1990. (See appendix table 4-44.) During this period, Germany's annual spending equaled 26 to 29 percent of U.S. nondefense R&D spending, while France's annual spending was equivalent to 17 to 18 percent, and the United Kingdom's annual spending fluctuated narrowly between 15 and 16 percent of the U.S. total.
Since 1990, the worldwide slowing in R&D spending and the subsequent apparent recovery in the United States has narrowed the gap between U.S. nondefense R&D spending and that in the other G-7 countries. In 1995, the combined nondefense R&D spending in these six countries equaled $163 billion (in constant PPP dollars), compared with $138 billion (constant dollars) in the United States. Japanese and German spending relative to U.S. spending declined to 50 and 25 percent, respectively.
In normalizing for the size of these economies, the relative position of the United States is slightly less favorable. Japan's nondefense R&D/GDP ratio (2.7 percent) considerably exceeded that of the United States (2.1 percent) in 1995, as it has for years. (See figure 4-21 and appendix table 4-44.) The nondefense R&D ratio of Germany (2.2 percent and declining since a 1989 peak of 2.7 percent) and France (2.1 percent) roughly matched the U.S. ratio; the ratios of the United Kingdom (1.8 percent), Canada (1.6 percent), and Italy (1.1 percent) were somewhat lower. As with total R&D ratios, the nondefense R&D/GDP shares were level or falling in the United States, Germany, and Japan during the early 1990s.
The large G-7 countries are markedly similar in terms of which sectors undertake the R&D. Industry was the leading R&D performer in each; performance shares in the mid-1990s ranged from a little more than 70 percent in the United States and Japan, to somewhat less than 60 percent in Italy. Industry's share ranged between 60 and 70 percent in Germany, France, the United Kingdom, and Canada. (See figure 4-23 and appendix tables 4-45 and 4-46.) The majority of industry's R&D performance was funded by industry itself in each of these countries, followed by government funding. Government's share of funding for industry R&D performance ranged from as little as 2 percent in Japan to about 18 percent in the United States.
In most of the G-7 countries, the academic sector was the next largest R&D performer (at about 15 to 22 percent of the performance total in each country), followed by government laboratories. Only in France was government's R&D performance (which included spending in several nonprivatized industries and in some sizable government laboratories) slightly larger than that of academia. Government's R&D performance share was smallest in Japan and the United States, at about 10 percent of each country's total.
For comparison, 66 percent of the 5.1 trillion rubles spent on R&D in the Russian Federation in 1994 was performed within business enterprises; 28 percent was undertaken in the government sector, including the Russian Academy of Sciences; and most of the remaining 6 percent was performed in institutions of higher education. Notably, however, it is reported that universities are having difficulty competing with Academy institutes in basic research and with industry in applied R&D; therefore, the higher education sector is gradually losing its position in the overall R&D effort (Gohkberg, Peck, and Gacs 1997).
Consistent with performing most of these countries' R&D activities, the industrial sector provides the greatest proportion of financial support for R&D. Shares for this sector, however, differed somewhat from one country to the next. Industry provided more than 70 percent of R&D funds in Japan, 60 percent in Germany, and about 50 percent in the United States, the United Kingdom, Italy, France, and Canada. In each of these seven countries, government was the second largest source of R&D funding and also provided most of the funds used for academic R&D performance.
The R&D funding share represented by funds from abroad ranged from as little as 0.1 percent in Japan to more than 14 percent in the United Kingdom. Indeed, foreign fundingpredominantly from industry for R&D performed by industryis an important and growing funding source in several countries. Although its growth pattern has seldom been smooth, foreign funding now accounts for more than 10 percent of industry's domestic performance totals in France, Canada, and the United Kingdom. (See figure 4-24.) Such funding takes on even greater importance in many of the smaller OECD and less industrially developed countries (OECD 1997a). In the United States, approximately 11 percent of funds spent on industry R&D performance in 1995 are estimated to have come from majority-owned affiliates of foreign firms investing domestically. This amount was up considerably from the 3 percent funding share provided by foreign firms in 1980. (See appendix table 4-46 and "Foreign R&D in the United States.")
The categorization of the R&D effort as either basic research, applied research, or development is quite similar among large, R&D-performing countries for which there are recent data. For several of these countries, however, such comprehensive national statistics either are not collected or are considerably out of date. As documented earlier in the chapter, the United States expends about 15 percent of its R&D on activities that performers classify as basic research. (See discussion on basic research in "R&D Support and Performance by Character of Work" earlier in this chapter.) Much of this research is in the life sciences. Basic research accounts for a similar portion of the R&D total in Japan and the Russian Federation14 percent and 16 percent, respectively. (See figure 4-25.) However, as a share of domestic basic research totals, engineering fields receive relatively more funding in these two countries than in the United States. In France and Germany, the basic research share represented about 21 to 22 percent of the R&D total in the mid-1990s (OECD forthcoming). In each of these countries, development activities accounted for the largest percentage share of total.
The downturn in R&D growth within OECD countries has been disproportionately caused by negative or near-zero growth in government-funded R&D since the late 1980s. These developments are both a reflection of and an addition to the worldwide R&D landscape changes. Such changes are presenting a variety of new challenges and opportunities. The transition of Eastern European communist systems into market economies, the growth of the S&T base in the Pacific Rim, the increase in the international competitiveness of many countries, public and private sector demands for budgetary accountability, evolution of new and emerging technologies, and realignments within industry and at research universities have combined to present governments with historically unparalleled issues of purpose and direction in designing S&T policy. The following sections highlight government R&D funding priorities in several of the larger R&D-performing nations, summarize broad policy trends, and detail indirect support for research that governments offer their domestic industries through the tax code.
A breakdown of public expenditures by major socioeconomic objectives provides insight into governmental priorities, which differ considerably across countries. In the United States during 1996, 55 percent of the Government's $69 billion R&D investment was devoted to national defense; compared with 41 percent in the United Kingdom (of an $8 billion government total); 29 percent in France (of $13 billion); and 10 percent or less each in Germany, Italy, Canada, and Japan. (See figure 4-26 and appendix table 4-41.) These recent figures represent substantial cutbacks in defense R&D in the United States, the United Kingdom, and France, where defense accounted for 63 percent, 44 percent, and 40 percent of government R&D funding, respectively, in 1990. However, defense-related R&D also seems particularly difficult to account for in many countries' national statistics. (See "Accounting for Defense R&D: Discrepancies Between Performer- and Source-Reported Expenditures.") [Skip Text Box]
In many OECD member countries, including the United States, there is a considerable difference in the total government R&D support figures reported by government agencies and those reported by performers of the R&D work. Consistent with international guidance and standards (OECD 1994), however, most countries' national R&D expenditure totals and time series are based primarily on data reported by performers. This convention is preferred because performers are in the best position to indicate how much they spent in the actual conduct of R&D in a given year, and to identify the source of their funds. Although there are many reasons not to expect the funding and performing series to match exactlye.g., different bases used for reporting government obligations (FY) and performance expenditures (calendar year)the gap between the two R&D series has widened during the past several years in several of the larger OECD member countries. Additionally, the divergence in the series is most pronounced in countries with relatively large defense R&D expenditures.
For 1995 or thereabouts, statistics from OECD's Main Science and Technology Indicators database show that in only 6 of the 28 member countries does defense account for 9 percent or more of government's total R&D budget (because several OECD member countries have never or not recently reported their R&D defense shares, funding differences in those countries could not be evaluated):
These six were precisely the countries for which the sums of performer-reported government R&D funding were substantially less than the total government-reported R&D support estimates. As a percentage of government's reported R&D totals that were not accounted for in each country's performer surveys, the largest gaps were reported for:
For the United States, the funding gap has become particularly acute over the past several years. In the mid-1980s, performer-reported federal R&D exceeded federal reports by $3 to $4 billion annually, or 5 to 10 percent of the government total. This pattern reversed itself so that in 1989 the government-reported R&D total exceeded performer reports by $1 billion. The gap has since grown to about $6 billion; in other words, about 10 percent of the government total in the mid-1990s is unaccounted for in performer surveys. (See figure 4-27 and appendix table 4-47.)
Based on preliminary findings, the difference in federal R&D totals appears to be concentrated primarily in DOD development funding of industry (primarily aircraft and missile firms). For 1995, federal agencies reported $30.5 billion in total R&D obligations provided to industrial performers, compared with an estimated $21.2 billion in federal funding reported by industrial performers. (DOD reports industry R&D funding of $22.7 billion, while industry reports using $13.9 billion of DOD's R&D funds.) Overall, governmentwide estimates equate to a "loss" of 31 percent of federally reported R&D support. (See figure 4-27 and appendix table 4-47.)
A workshop was held recently at NSF (September 1997) to discuss possible causal factors for the divergence. Although circumstances unique to each country contribute to the discrepancy between the two reporting sources, most participants agreed that the problem resides at least partially in reporting R&D for defense and aerospace programs and in tracking government's international R&D flows. In the case of defense and aerospace programs, workshop participants acknowledged possible differences in agency and performer reporting of "the true R&D content" of large extramural contracts where R&D and production activities are mixed. This circumstance is further complicated by the growing use of industry subcontracting and consortia activities in performing large-scale and complex defense projects. For many European countries, these activities are also collaborative and are performed internationally, so that the final R&D performers may be unable to accurately report the origin of the funds. The Science Resources Studies Division at NSF is conducting further research and investigation into these causal -phenomena.
Advancement of Knowledge. Japanese, German, and Italian government R&D appropriations in 1995-96 were invested relatively heavily (50 percent or more of the $15 billion totals for Japan and Germany, and of the $6 billion total in Italy) in advancement of knowledgei.e., combined support for advancement of research and general university funds (GUF). Indeed, the GUF component of advancement of knowledge, for which there is no comparable counterpart in the United States, represents the largest part of government R&D expenditure in most of these OECD countries.
Health-Related Research. The emphasis on health-related research is much more pronounced in the United States than in other countries. This emphasis is especially notable in the support of life sciences in academic and similar institutions. In 1996, the U.S. Government devoted 18 percent of its R&D investment to health-related R&D, making such activities second only to defense. (See "Patterns of Federal R&D Support.") Health R&D support approaches 10 percent of total spending in the governmental R&D budgets of the United Kingdom, Italy, and Canada.
Other Areas of R&D Emphasis. In comparison, Japan committed 20 percent of governmental R&D support to energy-related activities, which garnered the second largest share of Japanese R&D, reflecting the country's historical concern with its high dependence on foreign sources of energy. In Canada, 14 percent of the government's $3 billion in R&D funding was directed toward agriculture. Space R&D received considerable support in the United States and France (each getting 11 percent of the total), whereas industrial development accounted for 9 percent or more of governmental R&D funding in Germany, the United Kingdom, Italy, and Canada. Industrial development programs accounted for 4 percent of the Japanese total, but just 0.6 percent of U.S. R&D. The latter figure is understated relative to other countries as a result of data compilation differences.
This section provides greater detail on federal R&D funding priorities in the United States. Such priorities shifted overwhelmingly toward defense programs in the 1980s, which included both DOD programs and nuclear weapons research funded by DOE. Defense R&D spending peaked in 1987 at $47 billion (inflation-adjusted 1992 dollars), when it accounted for 69 percent of the federal R&D total. Since then, the data reflect a distinct de-emphasis on defense priorities, as defense-related R&D dropped to 54 percent of the government total in 1995, where it has since remained. (See figure 4-28 and appendix table 4-39.) Proposed federal R&D funding for defense-related activities accounts for 54 percent of the 1998 total.
Of the federal nondefense functions, healthparticularly the R&D programs of HHSexperienced the largest inflation-adjusted R&D funding growth since the early 1980s. Indeed, from 1990 to 1998, health R&D has grown by 26 percent (constant 1992 dollars) while funding for all other nondefense functions grew by just 3 percent. Health programs now account for 18 percent of the federal R&D funding total. In particular, AIDS-related research has grown substantially and now accounts for roughly 12 percent of federal health R&D funds, second only to the 16 percent share directed toward cancer research. Funding for space research, second to health among the nondefense functions in the United States, also grew rapidly in the late 1980s and now accounts for 11 percent of the Federal Government R&D total. Most of the R&D funding growth in this area has been in support of Space Station Freedom and its follow-on International Space Station activities.
Among the other major functional recipients of federal R&D funding, general science programs displaced energy activities as the third largest nondefense function in 1996, even though in constant dollars general science research funding is proposed to be no higher in 1998 than it was in 1992. Combined, defense plus these four nondefense functions account for 91 percent of proposed 1998 R&D budget authority.
In terms of basic research support, these five functions also account for a 91 percent share of the federal support total, but their relative rankings differ considerably from that for total R&D. (See appendix table 4-40.) Of the proposed $15.3 billion 1998 basic research budget authority, health functions (primarily programs of the National Institutes of Health) account for 46 percent; the general science programs of NSF and DOE for 19 percent; space functions for 10 percent; energy for 9 percent; and defense for 8 percent.
These aggregate funding priority data only begin to capture the extraordinary changes that have taken place in the international arena over the past several years and the resultant shifts in countries' S&T policy directions. According to a recent OECD (1996b) report, a number of common trends among countries are worth highlighting:
Tax treatment of R&D in OECD countries is broadly similar, with some variations in the use of R&D tax credits (OECD 1996a). The following are main features of the R&D tax instruments:
The Small Business Innovation Research (SBIR) Program was created in 1982 to strengthen the role of small firms in federally supported R&D. Since that time, the SBIR Program has directed nearly 37,000 awards worth more than $5.5 billion in R&D support to thousands of qualified small high-tech companies on a competitive basis. Under this program, which is coordinated by the Small Business Administration (SBA) and is in effect until the year 2000, when an agency's external R&D obligations (those exclusive of in-house R&D performance) exceed $100 million, the agency must set aside a fixed percentage of such obligations for SBIR projects. This percentage initially was set at 1.25 percent, but under the Small Business Research and Development Enhancement Act of 1992, it rose incrementally to 2.5 percent in 1997.
To obtain funding, a company applies for a Phase I SBIR grant. The proposed project must meet an agency's research needs and have commercial potential. If approved, grants of up to $100,000 are made to allow the scientific and technical merit and feasibility of an idea to be evaluated. If the concept shows potential, the company can receive a Phase II grant of up to $750,000 to develop the idea further. In Phase III, the innovation must be brought to market with private sector investment and support. No SBIR funds may be used for Phase III activities.
Eleven federal agencies participated in the SBIR Program in 1995, making awards totaling $865 million-an amount equivalent to 1.3 percent of all government R&D obligations. The total amount obligated for SBIR awards in 1995 was 30 percent more than in 1994, a result of legislatively required increases in R&D amounts agencies must earmark for SBIR. Whereas 71 percent of the grants awarded were Phase I grants (3,085 of 4,348 awards in 1995), roughly 70 percent of total SBIR funds were disbursed through Phase II grants. Approximately 48 percent of all SBIR obligations were provided by DOD, mirroring this agency's share of the federal R&D extramural funding total. (See appendix table 4-37.)
There have not been many assessments of the overall effectiveness of the SBIR Program, although it is generally agreed that the quality of funded research proposals is high. For example, GAO (1997c) reports that about one-half of surveyed DOD SBIR awards have led to sales of a product, process, or service; about 52 percent of these sales have been made to DOD or to its prime contractors, with remaining sales to private sector customers or others.
SBA classifies SBIR awards into various technology areas. In terms of all SBIR awards made during the 1983-95 period, the technology area receiving the largest (value) share of Phase I awards was advanced materials. Electronics device performance and computer communications systems were the leading technology areas for Phase II awards. More broadly, roughly one-fifth of all awards made from 1983 to 1995 were computer-related and one-fourth involved electronics. (See figure 4-29.) Each received more than 70 percent of its support from DOD and NASA. One-sixth of SBIR awards went to life sciences research, with the bulk of this funding provided by HHS.
Credits Provided by the Federal Government. As have many other countries, the U.S. Government has tried policy instruments in addition to direct financial R&D support to indirectly stimulate corporate research spending. The most notable of these efforts has been to offer tax credits on incremental research and experimentation (R&E) expenditures. The credit was first put in place in 1981 and has been renewed eight times, most recently through the end of May 1998. Although the computations are complicated, the tax code provides for a 20 percent credit for a company's qualified R&D amount that exceeds a certain threshold. Since 1986, companies have been allowed to claim a similar credit for basic research grants to universities and other qualifying nonprofit institutions, although the otherwise deductible R&E expenditures are reduced by the amount of the basic research credit. This basic research provision generally has gone unutilized.
The dollar value of R&E tax credits actually received by firms is unknown. Not all of the tax credits initially claimed by firms are allowed. Indeed, data from the Internal Revenue Service indicate that in any given tax year, this dollar value can be 20 to 30 percent less than the amount for which firms file claimsnearly $1.6 billion in 1992, the most recent year for which data are available (U.S. OTA 1995). This amount has fluctuated since the credit's inception in 1981, but has remained rather steady since 1988. (See appendix table 4-38.)
Additionally, as part of the federal budget process, Treasury annually calculates estimates of foregone tax revenue (tax expenditures) resulting from preferential tax provisions, including the R&E tax credit. As one measure of budgetary effect, Treasury provides outlay-equivalent figures that allow a comparison of the cost of this tax expenditure with the cost of a direct federal R&D outlay. Between 1981 and 1996, more than $27 billion was provided to industry through this indirect meansan amount equivalent to about 3 percent of direct federal R&D support. (See figure 4-30 and appendix table 4-38.)
Effectiveness of Credits Uncertain. Results of various studies undertaken since the mid-1980s have given the tax credit mixed reviews for its overall effectiveness. Assessments undertaken soon after initial enactment of the credit (those using data for the years 1981 to 1983) concluded that the R&E tax credit cost more in lost revenues than it produced in additional R&E expenditures. More recent and somewhat more comprehensive studies (using data for the years 1988 and later) indicate that the amount of induced R&E spending approximates revenue cost in the short term and exceeds it in the long term (U.S. OTA 1995 and U.S. GAO 1996c). Although some firms rely heavily on the credite.g., industries with rapidly expanding R&D outlays (as in communications and information technology) and industries for which R&D performance strongly affects market valuation (as in biotechnology)preliminary evidence indicates that the R&E tax credit rarely factors into individual firms' R&D planning processes. There are no studies that have empirically investigated the credit's net benefit to society.
Credits Provided by State Governments. The Federal Government is not the only source of fiscal incentives for increasing research. According to a recent survey of the State Science and Technology Institute (1997), 35 states offered some type of incentive for R&D activity in 1996. Many states offered an income tax credit modeled after the federal R&E credit guidelines. Fifteen states applied the federal research tax credit concepts of qualified expenditures or base years to their own incentive programs, although they frequently specified that the credit could only be applied to expenditures for activities taking place within the state. Other types of R&D incentives included sales and use tax credits and property tax credits.
Globalization of R&D activities has expanded considerably during the past two decades. This growth is exhibited in each of the R&D-performing sectors. Gains in cross-country academic research collaboration are indicated by the substantial increase in international coauthorships. (See chapter 5, "Trends in International Article Production") In the public sector, the rapid rise in international cooperation has spawned activities that now account for up to 10 percent of government R&D expenditures in some countries. International collaboration in scientific research involving extremely large "mega-science" projects also has grown, reflecting scientific and budgetary realities. Excellent science is not the domain of any single country, and many scientific problems involve major instrumentation and facility costs that appear much more affordable when cost-sharing arrangements are in place. Additionally, some scientific problems, such as global change research, demand an international effort.
In the private sector, international R&D collaboration is also on the rise, as is indicated by the growth of formal cooperative partnerships between firms. Growing international linkages are evidenced as well by the rise of overseas R&D activities performed under contract and through subsidiaries, and by the establishment of independent research facilities. Although the reasons for this growth are complex, multilateral industrial R&D efforts appear to be a response to the same competitive factors affecting all industries: rising R&D costs and risks in product development, shortened product life cycles, increasing multidisciplinary complexity of technologies, and intense foreign competition in domestic and global markets.
Industrial firms increasingly have sought global research partnerships as a means of strengthening their core competencies and expanding into technology fields considered critical for maintaining market share. Such international strategic technology alliances increased sharply throughout the industrialized world in the early 1980s and accelerated as the decade continued. Although growth of newly established alliances tapered off in the early 1990s, there is evidence of further expansion during the middle part of this decade. Formation of these strategic technology partnerships has been particularly extensive among high-tech firms in such core areas as information technologies, biotechnology, and new materials. (See figure 4-31 and appendix table 4-48.) Technological complementarity and reduction of the innovation period are primary catalysts for entering into core technology alliances; market entry and production-related factors are more relevant in technologically less advanced or more mature markets.
As the numbers have increased, the forms of cooperative activity have changed as well. The most prevalent modes of global industrial R&D cooperation in the 1970s were joint ventures and research corporations. In these arrangements, at least two companies share equity investments to form a separate and distinct company; profits and losses are shared according to the equity investment. In the second half of the 1980s and continuing into the 1990s, joint nonequity R&D agreements became the most important form of partnership. Under such agreements, two or more companies organize joint R&D activities to reduce costs and minimize risk, while pursuing similar innovations. Participants share technologies but have no joint equity linkages (Hagedoorn 1990 and 1996).
During the first half of the 1970s, strategic alliances were almost nonexistent in core technologies, as well as in other sectors, but expanded rapidly late in the decade. The number of newly made partnerships in the three core technologiesinformation technologies, biotechnology, and new materialsrose from about 10 alliances created in 1970 to about 140 in 1980 (Hagedoorn 1996). By 1986, this number had risen to 400 alliances, 250 of which were intraregional (that is, made between firms located in the same broad regions of Europe, Japan, or the United States); 150 were interregional (between firms located in separate regions). The majority of both types of alliances was between firms sharing information technologies such as computer software and hardware, telecommunications, industrial automation, and microelectronics.
For the decade since 1986, growth in core technology alliances has been continuous though irregular. Of the roughly 2,500 information technology alliances formed during this period, the largest number has been among U.S. companies and between European and U.S. firms. Among the 1,100 strategic biotechnology alliances, U.S.-European interregional partnerships have been more prevalent than any other, especially during the mid-1990s. In fact, by 1996 almost 60 percent of all biotechnology collaborations were interregional. The opposite was true of partnerships focusing on information technology, for whom intraregional alliances were created twice as often as interregional partnerships in 1996. (See figure 4-32.)
U.S. Industry's International R&D Investment Balance Stiff international competition in research-intensive, high-technology products, along with market opportunities, have compelled firms throughout the world to expand their overseas research activities. Foreign sources account for a growing share of domestic R&D investment totals in many countries (see figure 4-24), and many firms have R&D sites in countries outside of their home base. (See "U.S. Research Facilities of Foreign Firms" for a summary of recent statistics on foreign R&D sites in the United States.) Firms tend to adopt a global approach to R&D for one of two basic reasons:
Consistent with the worldwide trend of multinational firms establishing an R&D presence in multiple countries, considerable growth has occurred in R&D facilities being operated by foreign companies in the United States. According to a 1992 survey of 255 foreign-owned freestanding R&D facilities in the United States, about half were established during the previous six years (Dalton and Serapio 1993). These counts are only for those R&D facilities that are 50 percent or more owned by a foreign parent company.* In a recent update to this study (Dalton and Serapio 1998), the authors characterize the activities of 676 U.S. R&D facilities run by more than 350 European, Japanese, and other foreign companies. Significant findings of this study follow:
The most important reasons cited for Japanese foreign electronics R&D investment in the United States were to acquire technology and to keep abreast of technological developments (a home-base augmenting strategy). For automotive R&D, investment motives centered on assisting the parent company in meeting U.S. environmental regulations and customer needs (a home-base exploiting strategy).
*An R&D facility typically operates under its own budget and is located in a free-standing structure outside of and separate from the parent's other U.S. facilities (e.g., sales and manufacturing). This definition of an R&D facility consequently excludes R&D departments or sections within U.S. affiliates of foreign-owned companies.
U.S. companies' R&D investment abroad is roughly equivalent to R&D expenditures in the United States by majority-owned U.S. affiliates of foreign companies. In 1994 (the latest year for which complete data from the Bureau of Economic AnalysisBEAare available), industrial R&D flows into the United States totaled $12.7 billion, compared with the $11.5 billion in R&D expenditures by U.S. multinational firms in other countries. (See figure 4-33.) This approximate balance in R&D investment flows has persisted since 1989 when the majority-owned data first became available on an annual basis. However, a general shift has occurred in the aggregate "balance" of R&D flows over this period. In the early 1990s, a greater proportion of international R&D was spent abroad than was invested in the United States. It now appears the reverse is true, and more industrial R&D money is flowing into the United States than U.S. firms are investing abroad.
Europe is both the primary source and the main destination of these U.S.-foreign industrial R&D flows. (See figure 4-34.) European firms invested $11.6 billion of R&D money in the United States in 1995; the Asian (including the Middle East) and Pacific region provided the second largest source of foreign R&D funds, with $1.6 billion. Similarly, U.S. companies invested $8.3 billion of R&D in Europe and $1.9 billion in Asian and Pacific region investments. Bilateral R&D investments between Canada and the United States are in the $1 billion to $1.4 billion range. R&D flows remain small to negligible both into and out of Latin America and Africa.
Since 1985, U.S. firms generally increased their annual funding of R&D performed outside the country. (See appendix table 4-50.) Indeed, 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 versus 3.4 percent average annual constant-dollar growth). Industries' total R&D performance, including funding from federal sources, grew at a meager 1.4 percent annual rate over the 1985-95 period. Equivalent to about 6 percent of industry's domestic R&D funding in 1985, overseas R&D now accounts for 12 percent of U.S. industry's on-shore R&D expenditures. (See figure 4-35.) Additionally, according to BEA data, the majority-owned (that is, 50 percent or more) foreign-affiliate share of U.S. multinational companies' worldwide R&D expenditures increased from 9 percent in 1982 to 13 percent in 1990, where it remained through 1994 (Mataloni and Fahim-Nader 1996).
Lion's Share for Chemicals Industry. R&D investment by U.S. companies and their foreign subsidiaries in the chemicals (including pharmaceuticals and industrial chemicals) industry accounts for the largest share and greatest growth of foreign-based R&D activity. Indeed, drug companies accounted for 20 percent of total 1995 overseas R&D ($2.6 billion of the $13.1 billion total)equivalent to 25 percent of the pharmaceutical industry's domestically financed R&D. (See appendix table 4-50.) Of other major R&D-performing manufacturers, recent trends show the overseas R&D investment share of total R&D financing rising considerably for scientific instruments and the food industry.
Increased R&D Activity in Nonmanufacturing Industries. Similarly, the combined total for all nonmanufacturing industries shows substantial increases in foreign R&D activity since 1985, rising from 0.4 percent of domestic R&D funding that year to 8.0 percent in 1995. Part of this growth reflects increased international R&D financing by firms historically classified as nonmanufacturing industries (particularly computer, data processing, and architectural services). Part of the increase reflects the movement of firms previously classified as manufacturers (e.g., office computing companies) to service sector industries (e.g., software development).
Most R&D Performed in Europe, Though Shifting East. As indicated by BEA data on majority-owned foreign affiliates of nonbank U.S. multinational companies, most of the U.S. 1994 overseas R&D was performed in Europeprimarily Germany (28 percent of the U.S. overseas total), the United Kingdom (15 percent), France (11 percent), and Ireland (4 percent). (See figure 4-36 and appendix table 4-51.) Collectively, however, the current 72 percent European share of the U.S. total R&D investment abroad is somewhat less than the 78 percent share reported as recently as 1990. Since the early 1980s, U.S. R&D investments abroad have generally shifted away from the larger European countries and Canada, and toward Japan and other Asian countries.
By affiliate industry classification, more than one-half of the 1994 German-based R&D was performed by transportation equipment companies. In the United Kingdom and France, the chemicals industry accounted for the largest share of each countries' respective totals, whereas in Ireland, the machinery industry performed most of this U.S.-funded R&D. In Japan, which accounted for 10 percent of U.S. companies' 1994 R&D performed abroad, the largest share was performed in chemicals firms' foreign affiliates. (See text table 4-11.) Notably, the U.S. R&D investment in Asian countries other than Japan has grown substantially; for example, U.S. R&D spending in Singapore (primarily in machinery industries) now surpasses that in many European nations.
Like U.S. firms' overseas R&D funding trends, R&D activity by foreign-owned companies in the United States has increased significantly since the mid-1980s. From 1987 to 1995, inflation-adjusted R&D growth from foreign firms (U.S. affiliates with a foreign parent that owns 50 percent or more of the voting equity) averaged 12.5 percent per year. This growth contrasts quite favorably with the implied 3 percent average annual rate of real increase in U.S. firms' domestic R&D funding, and is almost 10 times the 1.3 percent 1987-95 growth rate of total domestic industrial R&D performance (including activities funded by foreign firms and the Federal Government). As a result of these various funding trends, foreign R&D was equivalent to 11 percent ($15 billion) of total industrial R&D performance in the United States in 1995or more than double that of its equivalent 5 percent share in 1987. Majority-owned affiliates accounted for just a 3 percent share of the U.S. 1980 industrial performance total. (See figure 4-37.)
Most R&D Flows From Five Countries. The geographic pattern of R&D flows into the United States differs from the trends noted for U.S. R&D spending abroad. Whereas countries other than G-7 countries have become increasingly important as a destination for U.S. funding, they are less important in terms of foreign R&D investments here. In 1995, 75 percent of foreign funding came from just five countries-Germany, Switzerland, the United Kingdom, France, and Japan. In 1980, firms from these five countries accounted for 62 percent of foreign R&D flows into the United States. Although the R&D flows from Canada and other European countries also increased steadily over the past 15 years, at least part of the significant expansion of foreign R&D expenditures is attributable to several major acquisitions by foreign multinational companies of U.S. firms, particularly of U.S. pharmaceutical and biotechnology firms with large R&D budgets.
Research Concentrated in Three Industries. Foreign-funded research was concentrated in three industries in 1995-drugs and medicines (mostly from Swiss and British firms), industrial chemicals (funded predominantly by German firms), and electrical equipment (one-third of which came from French affiliates). These three industries accounted for three-fifths of the $17.7 billion total 1995 foreign R&D investment by affiliates in which there was at least 10 percent foreign ownership. Concurrent with gains reported for all domestic U.S. R&D performance, foreignparticularly JapaneseR&D investment in the service sector was also significant. These industries accounted for 5 percent ($900 million) of the 1995 foreign R&D investment total, with most research being funded in computer, data processing, and research and management services. (See text table 4-12.)