The Innovation Race: Why It's More Important Than Ever for Public & Private Sectors to Invest in Basic R&D

WHEN THE U.S. WAS in a race with the Soviet Union some 50 years ago to put a man on the moon, spending by the federal government on what many call “basic” research and development (R&D) was at an all-time high. Basic R&D has no clear end-goal, but is the kind of research from which world-changing discoveries are made. It provides the building blocks for industry to conduct applied research to innovate and develop new, more sophisticated products and services. Without basic R&D, lifesaving cancer treatments may have never materialized. The U.S. would never have become the leader in silicon transistor manufacturing— think no Silicon Valley. And, the Internet may not exist.

 

It is widely understood how important basic R&D is to U.S. competitiveness, but investment in this kind of research has plummeted over the last several decades, by both the public and private sectors. Federal spending on R&D has fallen from close to two percent of the gross domestic product (GDP) in the 1960s to 0.8 percent in the first quarter of this year.

 

Adams Nager, an economic research analyst for the Information Technology & Innovation Foundation (ITIF)—a non-partisan, non-profit think tank in Washington, D.C. focusing on technology, policy issues and innovation economics—says the U.S. cannot afford to

 

 

lose its position as the world’s leading innovator.

 

“What I see in R&D that’s really troubling is the fact that government isn’t funding science the way that it used to,” said Nager. “If we stop striving to discover how to get to space how to cure cancer, or how to get a car to drive itself, we fall behind,” he said. “You can bet that other countries are not going to stop the pursuit of discovery.”

 

Federal spending on basic R&D is down; however, investment by the private sector in applied research is growing at its fastest pace in five decades.

 

A June 4 Bloomberg Business article reported that from November 2014 to March 2015, U.S. companies funded R&D at an annual rate of $316 billion. That figure represents 1.8 percent of the GDP—the largest share ever for the private sector.

 

To keep pace with today’s advancing technologies and remain competitive, international and domestic manufacturers are investing heavily in R&D spending. This is particularly true for automotive and technology key players like Volkswagen (VW) and Samsung.

 

German automaker VW has topped Strategy&’s Global Innovation 1000 list as the No. 1 biggest R&D spender for the last three years, offering up $13.5 billion in 2014. A significant portion of VW’s continuous investment is occurring right here in the U.S. where Volkswagen recently announced plans to build a new R&D center in Chattanooga, Tenn. that will focus entirely on the needs of U.S. drivers. The center will be constructed as part of VW’s $900 million Chattanooga manufacturing facility expansion and is geared toward driving the company closer to the American market. According to VW CEO Martin Winkerkron, the R&D facility will provide the company with “more firepower” to help VW understand American tastes.

 

 

South Korean tech giant Samsung, the Global Innovation 1000’s No. 2 biggest R&D spender for the last two years, spent a staggering 13.4 billion in 2014. This type of investment is no surprise considering that Korea’s R&D investment is rising faster than its peers. And, like VW, Samsung is also banking on the U.S. as a sound choice for an R&D center investment, announcing the $250 million purchase of its R&D hub in Mountain View, Calif. in May.

 

But while U.S. industry investment in applied research is on the rise again, investment in basic R&D has all but disappeared. Corporate-sponsored R&D labs like Bell Labs and Xerox Parc have been greatly diminished, leaving industry dependent upon the federal government and universities to conduct basic research and fuel innovation.

 

What is behind industry’s flight from basic R&D? In January 2015, Duke University’s National Bureau of Economic Research released a white paper entitled, Killing the Golden Goose? The Decline of Science in Corporate R&D that offers theories on why this trend is taking place.

 

Theory No. 1: fierce competition from other countries has U.S. companies desperate to protect their intellectual property.

 

“Large firms may still be investing in science but may be publishing less, perhaps in order to patent or better protect their research findings,” the paper reported.

 

Another theory blames competition from low-wage countries for the lack of R&D investment by U.S. companies. Why? Because competition from low-cost countries “can depress private investments in R&D by reducing cash flows, thereby reducing the amount of internal funds available to fund research.”

 

Nager suggests a much simpler theory behind the lack of investment by the private sector: it simply no longer makes business sense.

 

“For instance, if a company had privately funded the human genome project and it cost $10 billion, the value of that discovery is $50 billion, but the company is only able to realize $6 or $7 billion, they’ve made a net loss,” he said.

 

But perhaps what has economists and analysts the most concerned about the U.S.’s lack of investment in R&D is the impact it could have on labor productivity.

 

“The United States’ manufacturing labor productivity rates have been stagnant, falling well behind growth rates in Europe and east Asia, and even declined in the first quarter of 2015,” said Nager.

 

“As we look at how the U.S. is doing competitively with other nations, you can’t just look at the unemployment rate and say we have a 5.3 percent unemployment, compared to Germany at 4.7. In many regards, that does not matter. What does matter is the growth of our labor productivity, which equates directly to how our technology is progressing. And, right now, we’re slipping backwards.”

 

So, what can be done to encourage more investment by U.S. industry in R&D? Nager says we can start by strengthening the federal government’s R&D tax credit to create real incentives for companies to invest in both basic and applied research. The latest ITIF study found that the U.S. ranked just 27th out of 42 countries in terms of R&D tax generosity, and that ranking continues to slip.

 

Nager also noted strengthening the U.S.’s lab systems by increasing funding at research universities as another solution.

 

“We think a lot at ITIF about policies for how to transfer technology out of these labs and universities,” Nager said. “Robust tech transfer strategies are needed to get research out of the labs and into the private sector.”