Although North American businesses boast an impressive pipeline of new products to combat the threat of obsolesce, our global trading partners are boosting their R&D efforts, too. Their aim, of course, is to catch up with the United States. At the same time, however, the numbers show that domestic companies are scaling back their R&D efforts somewhat. The R&D spending gap between the U.S and the rest of the world is narrowing. And while it will take years for that R&D gap to close entirely, mounting investments in new products and improved processes confirm just how rapidly the technological competition
is intensifying.

The most recent (FY06) federal R&D budget request is an all-time high of $132.3 billion, $733 million above last year’s historic high, and 45% above federal research spending in fiscal year 2001.

Those are huge dollar figures and a sizeable percentage increase. But some of our toughest global competitors actually are spending more—at least as a percentage of their gross domestic products. U.S. investment in science is three times that of Japan and half again as much as all the European nations combined, says the Office of Science and Technology Policy. But American R&D represents 2.7% of GDP, whereas in Japan, the United States’ closest rival, R&D consumes 3.3% of GDP.

'A Critical Vulnerability'
So just how alarmed should we be over those figures? In May of this year, Norman R. Augustine, retired Lockheed Martin Corp. chairman and CEO, and Nobel laureate Burton Richter co-authored a Wall Street Journal article, claiming that U.S. government funding for research in engineering and the physical sciences had basically remained unchanged for 20 years, using inflation-adjusted dollars. By contrast, between 1991 and 2001, R&D expenditures in South Korea rose 220%, and in China 350%, the pair reported.

South Korea and China start from much farther back, and so North American R&D spending still greatly outstrips them in dollars. But, says Shirley Ann Jackson, president of Rensselaer Polytechnic Institute, a technological university based in Troy, New York, “While the U.S. has the strongest national economy with the largest per-capita income, its success masks a critical vulnerability. At home, the source of the innovative capacity and technological ability is thinning.”

Where exactly is this “thinning” taking place? Start with the government/academic/corporate breakdown of U.S. R&D expenditures. Federal funds constituted close to 60% of academic R&D expenditures over the past decade, as measured by the National Science Board’s “Science and Engineering Indicators 2004,” a bi-annual report. Since 1990, inflation-adjusted federal dollars for academic R&D have grown continuously, increasing by about 66% through 2002. That's the good news.

The bad news is that federal support to all other sectors declined by 14% during that time, reaching a low in 2000. In the five years since that nadir, federal funding for nonacademic R&D has rebounded—but not enough to offset the overall, long-term decline.

Company-funded R&D, which has outstripped its federally funded counterpart since 1980, reached a record $180 billion in 2000. Since then, it too has been in decline. In 2002, the most recent year for which statistics are available, corporate America spent roughly $177 billion on R&D, which comprised two-thirds of the national total of $276 billion.

Global R&D
The question is, why?

One reason may be the globalization of major corporate R&D. In Thomas Friedman’s book, The World is Flat, he calls this “the globalization of innovation.” North American companies may outsource R&D or have research done by their overseas subsidiaries (see “Build It and They Will Come,” p. 38). This means, according to Friedman, that no one country or company will be able to control the entire development cycle. In itself, that does not sound like a bad thing. But control of that cycle—the fact that we “owned” innovation while other countries were producers—always has been important to American competitiveness.

The North American metals industry provides a case in point. Some groundbreaking R&D efforts pay off in the short-term with new products. Some 70% of the types of steel used in new automotive construction didn’t even exist 10 years ago, for instance. Other efforts to develop new processes have longer-term, but potentially even greater ROIs, through development of new processes. Productivity at American steel mills has tripled over the past 20 years, from an average of 10 man-hours per finished ton to three man-hours, as reported by the American Iron and Steel Institute (AISI), a Washington, D.C.-based trade organization.

In the ever-changing global business landscape, it remains to be seen whether where R&D happens will matter. What is clear is that the owner of the patent will enjoy the ROI and the boost in competitiveness, and that only well-managed companies with an ongoing commitment to research and development, good times and bad, will be able to enjoy either.

© 2005 MSCI