Is R&D Still the "Engine of Prosperity"?

by George F. McClure

The term "engine(s) of prosperity" has become a favorite catchphrase for authors and speechwriters. A simple search turned up some 40 topics with this tag, ranging from railroads (in 1886) to the Internet, globalization — even diamond mining in Saskatchewan. A cluster of subjects closer to our interest — information, high technology, knowledge, invention, new technology, and workforce skills — are also listed. This latter group revolves around research and development (R&D) as the stimulus.

Historically, the United States has devoted about 2.5 percent of the Gross Domestic Product to R&D, growing to 2.66 percent in 2000. Since 1982, only Japan and Germany have rivaled the United States at this level. Japan has marginally exceeded the U.S. R&D investment ratio since 1988; that country reached a sustained 3 percent by 1998 and 3.16 percent by 2000, during a decade in which its GDP declined. Germany, on the other hand, has stayed below the U.S. ratio since 1991. With a $10 trillion economy, the U.S. spent $248 billion per year for total R&D in 2000, nearly 70 percent of which was funded by industry. Industry R&D grew at a real rate of 7 percent from 1994 to 2000, a remarkable achievement.

Prior to 1980, federal R&D expenditures exceeded those of industry, but with the winding down of the Cold War, federal R&D budgets declined while industry expenditures nearly doubled in constant dollars over 12 years. Today, industry performs three quarters of the nation's R&D. At the same time, it expends most of its R&D funds (71 percent) on product and services development rather than on research.

Universities and colleges perform 11 percent of the R&D in this country. And contrary to industry, more than two-thirds of academic R&D is devoted to basic research and a quarter to applied research, while the balance goes to development.

The remaining R&D activity in the United States is performed by the federal government (7 percent) and by non-profits and federally funded R&D centers (7 percent).

Between 1980 and 2000, federal R&D support grew at an inflation-adjusted rate of one percent, to $70 billion. In 1980, federal support accounted for 47 percent of the nation's total R&D, but by 2000 this figure had fallen to 26 percent. Federal R&D support, totaling $80 billion in FY 2001, is provided mostly by these agencies: 45 percent from the Department of Defense; 24 percent from the Department of Health and Human Services; 12 percent from the National Aeronautics and Space Administration; nine percent from the Department of Energy; and four percent from the National Science Foundation (NSF).

Health-related federal R&D has enjoyed a real annual growth rate of 5.8 percent over the past 20 years. It rose from a quarter of the federal, non-defense R&D budget in FY 1982 to nearly a half by FY 2001. The need to balance health-related R&D with greater funding for applied sciences and engineering has shaped the FY 2003 budget resolution for NSF to provide for a 15 percent growth in each of the next three years.

Globalization of U.S. industrial R&D has grown sharply. U.S. affiliates of foreign parent companies spent $22.1 billion on R&D in the United States in 1998, more than triple the level (in current dollars) in 1989. The top two areas for this investment were chemicals ($7.2 billion) and computers ($4.5 billion). Going in the other direction, R&D performed abroad by foreign affiliates of U.S. companies amounted to $15 billion in 1998, nearly double the 1989 level, with $4.5 billion funding transportation equipment R&D and $4 billion spent on chemical research.

So — is R&D the "engine of prosperity"? The answer is "yes," if the R&D is directed properly. The recent Japanese experience is that while R&D has achieved record levels as government support has increased, that nation has slipped into its second recession in five years. Japan's large corporate firms are reporting losses, and their share of R&D spending is declining. The problem seems to be that much of the R&D is not going into commercialization of new products, which historically has been a function of private industry. Japanese corporate research is being restructured to overcome this problem, but it may take a decade or more to see results.

Sources

Science & Engineering Indicators - 2002; National Science Foundation, http://www.nsf.gov/sbe/srs/seind02/start.htm

"Japan Asks Why More Yen Don't Yield More Products," Science, vol. 296, 17 May 2002, pp, 1230-1231

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George F. McClure is IEEE-USA's technology policy editor.