Chapter 4 | Research and Development: U.S. Trends and International Comparisons
U.S. Business R&D
Businesses have been the predominant performers of U.S. R&D dating back to the 1950s. In 2008, the business sector accounted for $290.7 billion (71.4%) of the $407.0 billion of U.S. total R&D (Table 4-8). In 2015, the business share was $355.84 billion (71.8%) of the $495.5 billion U.S. total. Year-to-year increases and declines in the level of business R&D performance greatly influence the U.S. R&D total. Indeed, the slowed growth and declines of U.S. R&D in the 2009–11 period owe much to the slowed growth and declines of the level of domestic business R&D in these years (Figure 4-2). (All amounts and calculations are in current dollars, unless otherwise noted.)
The business sectors of the U.S. economy are diverse, with wide differences in the goods and services provided across industries and in the various production inputs required, including roles for R&D. Historically, companies in manufacturing industries have accounted for two-thirds or more of U.S. business R&D, with the balance accounted for by companies in nonmanufacturing industries. As it turns out, however, the peaks in current U.S. business R&D stem from a relative handful of industries, classified in both the manufacturing and nonmanufacturing sectors.
Funds spent for business R&D performed in the United States: 2008–15
Key Characteristics of Domestic Business R&D Performance
NCSES’s annual Business R&D and Innovation Survey (BRDIS) provides data on all for-profit, nonfarm companies that are publicly or privately held and have five or more employees in the United States. U.S. business R&D is the R&D performed by companies in the domestic United States, including that paid for by the company itself (from company-owned, U.S.-located units or from company subsidiaries located overseas) and that paid for by others (such as other companies, domestic or foreign, including foreign parents of U.S. subsidiaries; the federal government; nonfederal government, domestic or foreign; and nonprofit or other organizations, domestic or foreign).
Presently, most domestic R&D performance occurs in five business sectors: chemicals manufacturing (North American Industry Classification System [NAICS] 325, which includes the pharmaceuticals industry); computer and electronic products manufacturing (NAICS 334); transportation equipment manufacturing (NAICS 336, which includes the automobiles and aerospace industries); information (NAICS 51, which includes the software publishing industry); and professional, scientific, and technical (PST) services (NAICS 54, which includes the computer systems design and scientific R&D services industries) (Table 4-9). Although a sector’s R&D performance total is influenced by both its overall economic size and the intensity of its R&D need (usually measured as dollars of R&D performance divided by total product sales), these are all sectors and industries with R&D intensities higher than others in the national economy (Table 4-10).
Funds spent for business R&D performed in the United States, by source of funds and selected industry: 2015
Sales and R&D intensity for companies that performed or funded R&D, by selected industry: 2015
In 2015, these five business sectors accounted for $296.7 billion (83%) of the $355.8 billion business R&D performance total that year (Table 4-9). Corresponding data for earlier years are much the same. In 2008, the five sectors accounted for $244.9 billion (84%) of the $290.6 billion business R&D performance total (Appendix Table 4-13). Computer and electronic products accounted for about 20% of the business R&D performance total in 2015. From 2014 back to 2008, its share was in the 20%–22% range. Chemicals accounted for 19% of the business R&D total in 2015—most of which arose in the pharmaceuticals and medicines industry. Chemicals’ share ranged from 19% to 21% in the previous years. The information sector accounted for about 18% of the business R&D performance total in 2015—nearly two-thirds of which was in software publishing. The information sector represented only 13% of the business R&D total in 2008, but its share has been rising since then. Transportation equipment (mainly the automobiles and aerospace industries) accounted for 14% in 2015 but had a higher share, at 17%, in 2008. Finally, the PST sector represented nearly 11% of the business R&D total in 2015—somewhat more than two-fifths is from the scientific R&D services industry, but R&D is also sizable in the computer systems design and related services industry. The PST sector’s share of the total was 13% in 2008 and has been gradually declining.
For U.S. business R&D as a whole, performance is funded mainly by companies’ own funds: 83% in 2015—the vast majority of which came from companies’ units owned and located in the United States (81%), but a small amount (nearly 2%) came from companies’ foreign subsidiaries (Table 4-8). The 17% remainder came from R&D performed by the company but paid for by others. Here, the federal government is the largest of these “paid for by” sources—about 8% of the business R&D performance total in 2015. Domestic companies other than the performer accounted for 4% of the 2015 total; foreign companies (including foreign parents) accounted for 5%. The “all other organizations” category spans a diverse group: state government agencies and laboratories, foreign agencies and laboratories, and any other domestic and foreign funding organizations. But this grouping accounts for a nearly negligible share—0.3% in 2015. Looking back to 2008, the most notable change in the relative shares compared with 2015 is the declining role of federal funding—13%–14% in 2008–09, down to 8% in 2014–15 (Table 4-8).
Nonetheless, there are some noteworthy differences when more narrowly defined sectors and industries are considered, particularly for the five top R&D-performing sectors (and their main industries) previously discussed (Table 4-9). R&D performance funded through a company’s own funds was highest (in 2015) in the information sector, where the share was nearly 99%. By contrast, the own-funds share was 59% in the transportation equipment sector and 57% in the PST sector. Even lower shares are found in specific industries: 24% in scientific R&D services and 41% in aerospace products and parts are own-funds.
The federal funding share is greatest in the transportation equipment sector (34%), particularly in the aerospace products and parts industry (55%). The share is also markedly higher in the PST sector (14%) than the all-industries average (8%). The next highest share is in the computer and electronic products sector, at 6%.
Funding provided by other domestic companies, for most of the sectors and industries, is at or below the 4% aggregate average. The exceptions are in PST, where such funding is 24% for the sector, and in scientific R&D services, where it is at an even higher 47%. Funding provided by foreign companies was about the 5% aggregate average for the PST sector and was somewhat below for the computer and electronic products and transportation equipment sectors. Foreign funding was well below the all-industry average in the information sector (less than 1%) and well above in the chemicals sector (11%).
Apart from direct funding for R&D in the form of contracts and grants to businesses, the U.S. government offers indirect R&D support via fiscal incentives such as tax credits. For recent statistics, see sidebar Federal Research and Experimentation Tax Credit and Appendix Table 4-14.
Finally, regarding domestic business R&D performance and company size (as measured by the number of employees), Table 4-11 provides statistics for 2008–15. In 2015, the largest companies (i.e., those with 25,000 or more domestic employees) performed 36% of U.S. business R&D. On the other side, micro companies (5–9 employees) and small companies (10–49 employees) accounted together for 5%. The other 59% was spread among the size classifications between these extremes. As is apparent from the table, the distribution of all business R&D by company size has not greatly changed since 2008.
Funds spent for business R&D performed in the United States, by size of company: Selected years, 2008–15
Cross-National Comparisons of Business R&D
The industries currently predominant in performing business R&D in the United States are generally also the same in the other largest R&D-performing countries. Table 4-12 provides cross-national comparisons for the United States, France, Germany, the United Kingdom, China, Japan, and South Korea (corresponding statistics for India and Russia are not presently available). These data come from the OECD’s Analytical Business Enterprise R&D (ANBERD) database. Note that the classification of industries in this table reflects the International Standard Industrial Classification of All Economic Activities (ISIC), Revision 4 for all countries (including the United States), which differs somewhat from NAICS, which is used to report U.S. data earlier in this section of the chapter. The coverage in Table 4-12 is also truncated, in that only those industries with comparatively higher levels of annual R&D performance are included—for a more complete listing of industries, see the OECD ANBERD database (as cited in Table 4-12). (All amounts and calculations are in current purchasing power parity or PPP dollars, unless otherwise noted.)
Business expenditures for R&D, by selected countries and top R&D-performing industries: 2014 or most recent year
Based on ISIC, the manufacturing section (ISIC 10–33) accounted for about 68% of the $340.7 billion of overall business R&D performance in the United States in 2014. As apparent in Table 4-12, this stemmed in large part from the relatively high levels of R&D performed in the computer, electronic, and optical products division (ISIC 26; $73.9 billion, or 22% of all business-performed R&D in the United States in 2014); the pharmaceuticals, medicinal chemical, and botanical products division (ISIC 21; $56.6 billion, 17%); and the air and spacecraft and related machinery industry (ISIC 303; $26.2 billion, 8%). (The shares reported here are not materially different from those reported earlier in this section based on the NAICS categories.)
Outside of manufacturing, a comprehensive group encompassing all services divisions (ISIC 45–99) accounted for most of the rest of U.S. business R&D in 2014 ($102.0 billion, or 30%) (Table 4-12). The information and communication section (ISIC 58–63) itself accounted for 22%, including software publishing (ISIC 582, 11%). The PST activities section (ISIC 69–75) represented 6%, including scientific research and development (ISIC 72, 4%).
For Germany, Japan, South Korea, and China, the manufacturing sector accounts for a substantially higher share of overall business R&D—87%–89%, depending on the country (Table 4-12). With Germany, the motor vehicles, trailers, and semi-trailers division (ISIC 29) accounted for 35% of the $72.4 billion of business R&D in 2014. The next largest share was computer, electronic, and optical products (ISIC 26) at 13%. For Japan, with $129.1 billion of business R&D in 2014, the R&D emphases were 25% in motor vehicles, trailers, and semi-trailers (ISIC 29); 21% in computer, electronic, and optical products (ISIC 26); and 11% in pharmaceuticals, medicinal chemical, and botanical products (ISIC 21). For South Korea, 53% of its $58.2 billion of business R&D in 2014 was in computer, electronic, and optical products (ISIC 26); the next highest share was 12% in motor vehicles, trailers, and semi-trailers (ISIC 29). China’s business R&D, $275.3 billion in 2014, although conducted mainly in manufacturing, is more diverse: 16% in computer, electronic, and optical products (ISIC 26); 8% in chemicals and chemical products (ISIC 20); and 8% in motor vehicles, trailers, and semi-trailers (ISIC 29), with the rest widely spread.
France and the United Kingdom are exceptions to the manufacturing emphasis, given the quite large shares of R&D that occur in services industries (Table 4-12). For France, 51% of its $36.0 billion of business R&D in 2013 was in manufacturing, with peaks in computer, electronic, and optical products (12%) and in air and spacecraft and related machinery (10%). But 46% of France’s business R&D total came from services, with 27% in the PST activities section (ISIC 69–75) and 12% in the information and communication section (ISIC 58–63). Somewhat similarly, for the United Kingdom, with $28.2 billion of business R&D in 2014, 39% is in manufacturing, with modest emphases in motor vehicles, trailers, and semi-trailers (10%) and air and spacecraft and related machinery (8%). But 59% is in services—35% in PST activities (ISIC 69–75) and 15% in information and communication (ISIC 58–63).
R&D by Multinational Enterprises
The extent and geographic spread of R&D by multinational enterprises (MNEs) are useful markers of the increasingly global character of supply chains for production and innovation in R&D-intensive sectors. These business activities reflect a mix of international economic trends, including the increased complexity of global supply chains, the deepening arrays of scientific or technological capabilities and resources around the globe, and the need to economically and strategically strengthen internal technological capabilities (Moncada-Paternὸ-Castello, Vivarelli, and Voigt 2011; OECD 2008).
This section is based on MNE operations data collected in annual foreign direct investment surveys conducted by the U.S. Bureau of Economic Analysis (BEA). These data cover majority-owned affiliates (those owned more than 50% by their parent companies) of foreign MNEs located in the United States (Survey of Foreign Direct Investment in the United States) and U.S. MNEs and their majority-owned foreign affiliates (Survey of U.S. Direct Investment Abroad). (All amounts and calculations are in current dollars, unless otherwise noted.)
R&D Performed in the United States by Affiliates of Foreign Multinational Enterprises
Affiliates of foreign MNEs located in the United States (hereafter, U.S. affiliates) performed $56.9 billion of R&D in the United States in 2014 (Table 4-13). This was equivalent to 17% of the $340.7 billion of business R&D performed in the United States in 2014 (comparing data in Table 4-1 and Table 4-13). Both the level of U.S. affiliate R&D and its share of the total of U.S. business R&D have generally increased since the late 1990s. In 1997, U.S. affiliate R&D was $17.2 billion, or equivalent to 11% of the U.S. business total; in 2007, it was $41.0 billion, or equivalent to 15% of the U.S. business R&D total (Appendix Table 4-2 and Appendix Table 4-15).
About more than two-thirds of U.S. affiliate R&D in 2014 was performed by firms owned by parent companies based in five countries: Switzerland (19%), Japan (14%), the United Kingdom (13%), France (12%), and Germany (12%) (Table 4-13). Although the relative rankings have shifted somewhat from year to year, these have been the predominant countries throughout the last 5 years.
R&D performed by majority-owned affiliates of foreign companies in the United States, by selected industry of affiliate and investor country: 2014
U.S. affiliates classified in manufacturing accounted for 72% of the U.S. affiliate R&D total in 2014 (Table 4-14). This manufacturing share has generally been 70% or more since 2007 (Appendix Table 4-16). The chemicals subsector share was 39%, and the pharmaceuticals share (a component of chemicals) was 36%. Other manufacturing subsectors with appreciable shares in 2014 included transportation equipment (11%), computer and electronic products (9%), and machinery (5%) (Appendix Table 4-16). For nonmanufacturing, the most notable sectors in 2014 were wholesale trade (15%) and PST services (9%). (Affiliates are classified in the industries in which they have the most sales; many affiliates classified in wholesale trade have manufacturing operations as well.)
R&D performed abroad by majority-owned foreign affiliates of U.S. parent companies, by selected industry of affiliate and host region, country, or economy: 2014
U.S. Multinational Enterprise Parent Companies and Their Foreign Affiliates
R&D performed outside the United States by majority-owned foreign affiliates of U.S. MNEs totaled $52.2 billion in 2014 (Table 4-14). The parent companies of these U.S. MNEs performed $268.8 billion of R&D in the United States (Appendix Table 4-19), which was equivalent to about 79% of the total business R&D conducted in the United States that year. In 1997, foreign affiliates’ R&D performance abroad was $14.6 billion; in 2007, it was $34.4 billion (Appendix Table 4-17).
European countries hosted $30.8 billion (59%) of this foreign affiliate R&D in 2014 (Table 4-14). The largest R&D expenditures by U.S.-owned affiliates in this region were in Germany ($8.3 billion, 16%) and the United Kingdom ($6.3 billion, 12%). Other notable locations included Switzerland ($4.1 billion, 8%), Ireland ($2.4 billion, 5%), France ($2.4 billion, 5%), the Netherlands ($1.2 billion, 2%), and Belgium ($1.2 billion, 2%). The European share overall was 66% in 2007 and 69% in 1997 (Appendix Table 4-17). Germany and the United Kingdom were the predominant host countries over this 15-year period, although the two countries had more evenly matched shares before 2008.
Canada hosted $3.4 billion (7%) of U.S. MNE foreign affiliate R&D in 2014, a sizable amount in comparison with most other countries. Although Canada has seen increased levels of U.S. foreign affiliates’ R&D performance since 1997 (albeit with some year-over-year volatility), its share has been gradually declining since then (Appendix Table 4-17).
Countries in the Asia and Pacific regions hosted $12.6 billion (24%) of U.S. foreign affiliate R&D in 2014 (Table 4-14). Majority-owned affiliates of U.S. MNEs in China ($3.0 billion, 6%), India ($2.9 billion, 6%), and Japan ($2.5 billion, 5%) had the largest R&D expenditures in this region. As in other cross-national comparative indicators for R&D, the Asia/Pacific region continues to gain an increasing share as a host for U.S. parent companies’ foreign affiliate R&D. The region accounted for only 13% of the total in 1997. Whereas Japan’s share has remained sizable across the 1997–2014 period, though declining somewhat since the early 2000s, the growth areas for foreign affiliate R&D have been India and China, each of which accounted for a negligible share in the late 1990s but grew to exceed that of Japan by 2014 (Appendix Table 4-17).
Latin America and other Western Hemisphere countries—mostly Brazil—accounted for $2.3 billion (4%) in R&D expenditures by U.S.-owned affiliates in 2014. U.S.-owned affiliates in the Middle East—nearly all in Israel—accounted for $2.9 billion (6%) in 2014.
With respect to economic sectors, foreign affiliate R&D of U.S. MNEs was concentrated in four industries in 2014: PST services ($10.3 billion, 20%), chemicals particularly pharmaceuticals ($8.5 billion, 16%), computer and electronic products ($8.4 billion, 16%), and transportation equipment ($7.7 billion, 15%) (Table 4-14). Other notable industries include wholesale trade ($5.0 billion), information ($4.0 billion), and machinery ($2.9 billion). These industries have been similarly prominent over the last several years (Appendix Table 4-18).
As noted, Europe (as a whole) and Japan remain top R&D hosts for U.S. MNEs in major industries, reflecting both strengths of the host countries in certain technologies and the large, longstanding investments by U.S. MNEs in these locations (Appendix Table 4-17). In transportation equipment, Germany is by far the largest location of U.S.-owned affiliates’ R&D—$2.8 billion of the $7.7 billion total R&D in 2014 performed by majority-owned foreign affiliates of U.S. MNEs is classified in this industry (Table 4-14). Similarly, for computers and electronic products manufacturing, Germany was the leading host location, with $2.0 billion in R&D expenditures out of the $8.4 billion total R&D performed by majority-owned foreign affiliates of U.S. MNEs classified in this industry. In chemicals manufacturing, the United Kingdom, Japan, and Ireland were the top locations of U.S.-owned affiliates’ R&D in 2014—each accounting for $0.9 billion, of the $8.5 billion in total U.S.-owned affiliates’ R&D in this industry.
For R&D performed by U.S. MNE foreign affiliates classified in PST services, the host country roles reflect both older trends and the rise of Asia as a host of U.S.-owned R&D (Table 4-14). The United Kingdom hosted the largest amount of R&D performed in this industry in 2014 ($1.6 billion of the $10.3 billion total of U.S.-owned affiliates’ R&D outside the United States). The second, third, fourth, and fifth largest were, respectively, Israel ($1.3 billion), India ($1.3 billion), China ($1.1 billion), and Germany ($0.6 billion).