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06.07

Are We Doing Enough for R&D Funding?

By George McClure

There is general agreement that the secret to maintaining U.S. competitiveness is innovation. Commodity manufacturing will move offshore but, the reasoning goes, if the United States is first to market with new technology, it will maintain a leading position among its competitors. The World Economic Forum publishes annually its Global Competitiveness Index, ranking 125 economies on nine pillars, one of which is innovation [www.weforum.org/en/initiatives/gcp/Global%20Competitiveness%20Report/index.htm]. The United States was ranked number one in 2005, but fell to number six in 2006, behind Switzerland, Finland, Sweden, Denmark and Singapore [www.weforum.org/pdf/Global_Competitiveness_Reports/Reports/gcr_2006/].

Professor Michael Porter, who has written extensively on competitiveness, says the secret to staying at the forefront is gains in productivity. After making great strides during the late 1990s (average productivity gain of 2.5 percent) and from 2002 to 2004 (gains at a 3 percent rate), our non-farm productivity improvement has slipped during the past 30 months to an annual rate of 1.5 percent. The indicated rate for the first quarter 2007 is 1.7 percent, but that may be soft since it assumes full hours worked (there are indications to the contrary).

Fifty years of corporate R&D

When AT&T had a monopoly on telephone service, it was able to afford Bell Laboratories, which not only supported innovation in switching systems but also performed a variety of other long-term research with no immediate payoff. One of those other breakthroughs was the transistor. In 1950, there were some 25,000 researchers at Bell Labs. But with the deregulation of the telephone industry, Bell Labs shrank (to 1,000 researchers in 2003) and was spun off to Lucent Technologies which is now part of the French company Alcatel.

Corporate R&D now is directed more toward development than research, because investment is more defensible with a near-term payoff. Basic research, especially, is dependent on government funding, both in the national laboratories and in grants for university research. Both the National Science Foundation and the Defense Advanced Research Projects Agency (DARPA) fund research grants, but critics point to a tilt lately toward development — with an emphasis on homeland security.

Government research funding falling

The proposed budget for Fiscal Year 2008 shows a reduction of 2.1 percent for basic and applied research from the 2007 total, to $55.5 billion. The American Competitiveness Initiative is supporting three agencies’ funding: the Department of Energy’s Office of Science (up 15.4 percent to $4.1 billion), the National Science Foundation (up 8.3 percent to $4.9 billion) and the National Institute of Standards and Technology (up 12.8 percent to $420 million). NASA R&D will climb 6.7 percent, but all of that goes to the development of new human spacecraft to replace the Space Shuttle, and to complete the International Space Station. NASA support for aeronautics will fall again.

The R&D budgets for the National Institutes of Health will fall 1.2 percent; the Department of Agriculture sustains a 10.8 percent cut in R&D.

The federal investment in basic and applied research will fall for the fourth year in a row in real terms if the FY 2008 budget is enacted, according to the American Association for the Advancement of Science, which prepares detailed yearly budget analyses [www.aaas.org/spp/rd/prev08p.htm].

Innovation is key

BusinessWeek recently tallied the top companies for innovation, based on a survey of some 2,500 executives [www.businessweek.com/go/innovativecompanies/]. The top five are Apple, Google, Toyota Motor, General Electric and Microsoft. Many companies show R&D expenditures in their financial reports, but for some large companies (such as GE, HP and Toyota) some digging is required. Cisco Systems (25th in the 2007 rankings, up from 28 in 2006) spends over $4 billion per year on R&D, but outsources basic research.

A new BusinessWeek service, the Company Insight Center on BusinessWeek.com, provided most of the information contained in the table below [investing.businessweek.com/research/company/overview/overview.asp].

The table shows the R&D invested as a percentage of sales for some representative technology companies. The percentages alone can be misleading. Electronic Arts has experienced declining sales of electronic games, while it steps up product development to recover.

Apple, number one for innovation in 2007, spent 5.93 percent of sales on R&D in 2004, but because sales have risen by 2.5 times, and R&D rose by only 45 percent, its R&D fell to 3.69 percent of sales in 2006. The major chipmakers invest heavily in R&D — mostly for manufacturing technology. Intel has a policy of using university researchers for basic science; it is developing a line of chips for health care and has announced a $2.5 billion fab facility in China.

As with other conglomerates, IBM, with its emphasis on services as well as physical products and software, may be misleading with its 6.75 percent of sales devoted to R&D. For 2006, R&D breakouts are available for only two automakers: Honda and Daimler-Chrysler. Honda is developing a diesel engine (in both 4- and 6- cylinder sizes) for its larger vehicles, and has a light jet air taxi.

Siemens’ competitor in the European power equipment industry, ABB, does not report its R&D expenses separately, but has encountered stormy weather financially. Siemens acquired the assets of Westinghouse power generation some time back.

Two makers of flat panel displays, AU Optronics and LG.Philips, have been hit hard by the falling prices of displays, but AU Optronics (in Taiwan) stayed in the black, while LG.Philips, a joint venture between LG of Korea and Philips of the Netherlands, did not.

The budget for defense R&D climbs to record levels, thanks in part to supplemental budget requests, accounted for by weapons systems developments (up 5.5 percent to $68.1 billion). Basic and applied research for defense science and technology (plus medical research) are cut by 20.1 percent.

It has been pointed out that the smart weapons we have today were developed starting over 25 years ago. But we are not doing much on the basic and applied research front to lay the groundwork for later new weapon developments that will be needed in the pipeline for the future.

A more extensive listing of R&D expenditures for 2005 is found at www.technologyreview.com/articlefiles/2005_rd_scorecard.pdf to provide comparisons with the 2006 data.

Dual-use technology is helpful in some defense and non-defense applications. Counter-suits at the World Trade Organization filed by Airbus and Boeing each charged the other with benefiting from government support (military contracts for Boeing and launch aid subsidies for new aircraft for Airbus) that aided their commercial positions.

George McClure is a member of IEEE-USA's Communications Committee, a member of the IEEE-USA Career and Workforce Policy Committee, and technology policy editor for IEEE-USA Today's Engineer. Comments may be submitted to todaysengineer@ieee.org.