17.4. R&D EXPENDITURE
Investment in R&D in the United States and other countries increased rather rapidly during the decade from the mid-1970s to the mid-1980s, although America's most rapid growth occurred between 1994 and 2000. The trend in recent years has been mixed, with Japan, Germany, and France still showing steady increases in spending up through 2006, while China's rate of increase is such that they will begin to surpass countries like France in a few years. The United States has also had mixed progress, with R&D investment slowing significantly after the turn of the century. These trends are shown in Figure 17.3. The expenditures as shown in Figure 17.3 have been converted into constant 2000 U.S. dollars, taking into account inflation and differences in the power of the national currencies of the countries involved.
Table 17.2 showed a rate of return of 7–42 percent on public R&D investment; the rate of return to society is even higher, ranging from 20 percent to 110 percent. Of course, if investments in R&D were at a higher level, it is very likely that the ROI would be lower. However, the fact that return on investment is now high suggests that we have not yet reached optimal levels of R&D activities. This does not imply that consulting engineering and professional firms or small industries could always profitably engage in internally funded basic or applied research. The size of the firm, the technology of the enterprise, the availability of resources for investment in research, the competitive market situation, the need for R&D activity, and an effective R&D organization within the firm should be evaluated before undertaking an investment in R&D.
Perhaps one of the best measures of R&D activity in a country is the number of scientists and engineers (S/E) employed in conducting R&D. Figure 17.4 shows the relative R&D efforts of four major research regions as indicated by the proportion of the labor force employed as scientists and engineers in R&D. Figure 17.5 shows national expenditures for R&D as a percentage of GDP for selected countries over a time scale showing the fluctuations from the Cold War and the turn of the century. R&D expenditures as a percentage of GDP has become one of the most widely used indicators of a country's commitment to scientific knowledge growth and technology development. In the post–Cold War world of today, the ratio of nondefense R&D expenditures is probably a better yardstick of a country's true commitment to the advancement of science and technology than most other measures. International comparisons of R&D expenditures change dramatically when defense-related expenditures are excluded. As seen in Figure 17.5, the nondefense R&D ratios of both Germany and Japan have been considerably greater than that of the United States after the turn of the century.
Figure 17.3. R&D Investment by Selected Country, 1981–2004: (Sources: National Science Foundation, Division of Science Resources Statistics, National Patterns of R&D Resources (annual series); and OECD, Main Science and Technology Indicators (2006).)
Figure 17.4. Researches in OECD Countries: Selected years, 1993–2002: (Source: OECD, Main Science and Engineering Indicators (2006). Science and Engineering Indicators 2008.)
Figure 17.5. R&D Expenditures as a Percentage of GDP, by Country: 1981–2005: (Source: Science and Engineering Indicators, 2008, p. O-18. Organisation for Economic Co-operation and Development, Main Science and Technology Indicators (2006). See Appendix Tables 4-35.)
Figure 17.6. U.S. R&D Expenditures by Character of Work-Total Funding $340 billion in 2006: (Source: Science and Engineering Indicators 2008, p. 4-15. National Science Foundation. Division of Science Resources Statistics. National Patterns of R&D Resources (annual series). See appendix tables 4-3, 4-7, 4-11, and 4-15.)
In the United States, R&D investment reached a level of $340 billion in 2006. Information regarding trends in R&D investment is shown in Figure 17.6. The relative distribution of R&D expenditures in 2006 by source, performer, and type of R&D is shown in Figure 17.7. As one would expect, industry-supported R&D focused on developing commercial products for marketing in the United States and overseas, whereas federally supported R&D focused on such areas as defense, health, space, energy, agriculture, and other noncommercial but nationally important areas.
The U.S. Office of Management and Budget (OMB) divides the federal budget into functional categories that reflect areas of U.S. federal government responsibility. Of the 16 major categories that contain R&D programs, national defense receives the largest share of U.S. federal investment in R&D, and health accounts for the next largest. Looking specifically at federal funding for basic research, the functional distribution is somewhat different, with health receiving the largest proportion, followed by general science and space. Basic research expenditures for defense were about 9 percent of the 1996 basic research total (Science and Engineering Indicators, 1993). This fraction of the budget has decreased to 5 percent for 2008. Relative distribution of U.S. federal funds for R&D by selected budget function is shown in Figure 17.8 (Science and Engineering Indicators 2008).
Figure 17.7. Relative Distribution of U.S. R&D Expenditures by Source, Performer, and Character of R&D: 2006: (Source: Science and Engineering Indicators 2008, p. 4-15.)
How different governments invest in R&D clearly shows the socioeconomic objectives considered important at the policy level. In the United States, much of the federal government investment is for defense, health, and civil space, while investment in energy is moderate and investment for industrial development is almost nonexistent, as shown in Figure 17.9. For Japan and Germany, government R&D support patterns are much different. For France and the United Kingdom, while the investment in defense is sizable, their investment in industrial development compares favorably with Japan and Germany. In the United States, historically, the direct role of government in industrial development or investment in R&D has not been well accepted by industry or science policy-makers. The question is often raised: Should the government pick "winners" and "losers" by supporting certain R&D projects for industrial development?
Figure 17.8. Federal R&D Funding for Defense and Non-Defense, 2007 dollars: (Source: NSF, Division of Science Resources Statistics, Federal Funds for Research and Development: FY 2005, 2006, and 2007 (forthcoming). See Appendix Table 4-30, Science and Engineering Indicators 2008, p. A4-53.)
Figure 17.9. Percent of Government R&D Support for Industrial Production, 2005–2006: (Source: Organisation for Economic Co-operation and Development, special tabulations (2007). See appendix table 4-41. Science and Engineering Indicators 2008.)
It is generally believed that, in the long run, government is not likely to allocate resources as efficiently as the market. As discussed earlier in the chapter on university research enterprise, the government's proper role is investing in basic research, which provides a foundation for innovation without selecting winners and losers; and investing in nationally important missions such as defense, health, and civil space is a prudent course of action. Providing incentives to industry for taking a long-term view of investment in R&D could fulfill the need for increased industrial investment in R&D in the United States.
Since defense-related R&D is not primarily oriented toward a nation's trade competitiveness, its public health, or other nondefense objectives, a comparison of nondefense R&D expenditures to GDP may be of interest. Figure 17.5 provides this information.
The major market economies of the world spend similar proportions of their GDPs (between 2.2 and 3.2 percent) on all research and development. How this has varied over the years is shown in Figure 17.5. Differences among the five nations are more dramatic when R&D expenditures for nondefense purposes are compared. For instance, Japan is spending in excess of 50 percent more as a percentage of GDP on nondefense R&D as compared to the United States, France, or the United Kingdom. It is significant to note, however, that funding of defense-related R&D for 1992–1994 represented between 33 percent and 55 percent of total government R&D funding in the United States, the United Kingdom, and France. At the same time, this expenditure was only 8.5 percent in West Germany and an even smaller 6 percent in Japan (Science and Engineering Indicators, 1995). Clearly, as the share of national R&D effort devoted by a country to defense-related activities increases, resources available to business-related research activities decreases. Historically, the reasons that West Germany and Japan spend less on defense-related R&D are the legal and constitutional constraints placed on these countries by the Allies at the end of World War II.
Data show that countries that spend proportionally less of their national R&D resources on defense enjoy the greatest GNP and productivity growth rate (Rothwell and Zegwell, 1981, p. 26). Clearly, there are many technical spin-offs from defense-related R&D, but this is not an efficient way to develop new technology, and the opportunity cost to economic growth of defense-related R&D is clearly high (Rothwell and Zegwell, 1981, p. 26).
In developing national science policy, it is important to understand the critical need for R&D investment in defense-related activities. National policies in the United States and other industrialized countries with similar international responsibilities (e.g., United Kingdom and France) favor such expenditures. This is one area where the federal government, and not industry, must assume its proper responsibility and provide for an adequate national defense. Since R&D expenditures can increase productivity, R&D expenditures on defense-related activities can therefore reduce the proportion of GDP allocated to defense and thus lessen the nation's total defense related expenditure to achieve the same defense capabilities.
A National Academy of Sciences (1995) report argues that the federal research budget is now defined so broadly that it is difficult to say how relevant it is to the health of U.S. science. The report suggests that a more meaningful definition of R&D that includes only activities that generate new knowledge or technologies and leaves out items that are related to mission-oriented agency activities (e.g., new military hardware that consumes enormous R&D budgets) would provide a much sounder basis for understanding real national investment in science. In turn, this would provide a more meaningful basis for science policy making. If this approach were used, the current federal R&D budget would be about half of the total sum the government now claims to spend on R&D. Another benefit from this approach from a science policy point of view would be that mission-oriented agency programs that are now lumped in the total R&D budget would have to be defended on their own terms rather than for their contribution to science. Explicit decisions then could be made for these funds in terms of their tangible contribution to agency missions.