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December 22, 2003
Volume 81, Number 51
CENEAR 81 51 p. 13
ISSN 0009-2347


Bad News For 2004 Investment In R&D


U.S. industrial spending on research and development has declined in recent years, and it appears that trend will continue in 2004 if inflation is taken into account.

That's the conclusion of the 20th annual R&D Trends Forecast, released last week by the Industrial Research Institute (IRI). Firms that belong to IRI account for about 60% of the industry-funded R&D performed in the U.S. Almost half of the 207 member companies contacted by the institute participated in a survey that serves as the basis for the forecast.

The companies that responded to the survey indicated that they plan to spend a shrinking share of shrinking revenue on R&D in the coming year, according to Albert L. Johnson II, senior analyst for science and technology with Corning. Johnson chairs IRI's Research-on-Research Committee, which conducts the survey.

More companies plan to reduce R&D spending than to expand it. In real terms, less than one-third of companies in the IRI survey plan to increase total R&D spending in 2004 versus 2003, according to Johnson. Anticipated reductions will also "outnumber increases in capital spending, basic research, support of existing businesses, staffing, new-grad hiring and even outsourcing and licensing," he notes in an article about the survey that will appear in the January/February issue of IRI's Research Technology Management journal.

There are some bright spots in the data, however. The fraction of participants that expect increases of 5% or more as compared with last year rose in several areas--including company R&D spending, R&D capital spending, hiring of new graduates, and size of R&D professional staff--though these respondents continue to represent only about 10 to 20% of the total.

Johnson said survey respondents are increasing their contact with federal labs, their participation in joint ventures and alliances for R&D, and their involvement in precompetitive consortia with academe and industry partners. However, they will reduce outsourcing "in which they pay others to do research under contract."

Among companies that are publicly traded in the U.S., those that are headquartered abroad often spend more than U.S. firms on R&D as a fraction of sales, Johnson said. This ratio, which is termed research intensity, is 4.2% for firms based in Japan, 3.2% in Germany, 5.7% in Finland, and 5.1% in Sweden. But this figure is just 1.7% in the U.S. and the U.K.

And the U.S. situation isn't likely to improve, at least in the short term. More than one-fourth of the U.S. companies that responded to IRI's survey intend to reduce R&D intensity in the coming year--more than twice the number that plan to increase it. Johnson urged domestic firms to do better, citing a study of companies that became industry leaders after a recession. As compared with their competitors, those companies had increased the intensity of their R&D spending when the recession was coming to an end.

Statistics provided by the National Science Foundation put the IRI findings in a broader context. John E. Jankowski, director of NSF's R&D statistics program, presented projections based on data drawn from 31,000 industrial firms; federal agencies that fund or conduct research; and colleges, universities, and nonprofit organizations.

His conclusions are similar to IRI's: The conditions for industrial R&D are "a lot bleaker than we initially thought," Jankowski said. In constant dollars, support for the R&D performed by industry declined 2% in 2001 and 4% in 2002, and it is expected to fall another 1% this year, he said. In the chemical sector, this figure is projected to drop 16% this year.

Over the decades, the source of industrial R&D funds has changed enormously. Thirty years ago, Jankowski said, federal sources provided about 40% of industrial R&D funding and industry provided the remainder. Now the government chips in a mere 10%.

The picture is quite different in the support for total R&D. For 2003, industry is projected to put up 63% of the funding. The federal government is providing 30% of the total funding, while universities put in just 3%.

Jankowski noted that total R&D funding in inflation-adjusted terms has been nearly flat since 2000. While industry's contribution has backed off from that year's peak, the federal government has made up the difference with expanded spending in defense and homeland security R&D.

NSF expects total U.S. R&D expenditures to reach $284 billion this year, a rise of just 1.3% in inflation-adjusted dollars. The total represents 2.6% of the gross domestic product.

Industry will account for 68% of R&D performed this year, and the federal government and universities will account for 14% each.

Basic research's share of total R&D spending should reach 19% this year; applied research, 24%; and development, 57%, Jankowski estimated. Within the industrial sector, three-quarters of the R&D investment goes into development.

A significant fraction of that spending is funneled into projects that enhance current technology, but that distribution of resources may be restraining the potential expansion of U.S. business, according to Gregory C. Tassey, senior economist at the National Institute of Standards & Technology. He cited a Harvard Business Review study of high-tech firms showing that incremental innovations bring in 62% of revenue but only 39% of profits. On the other hand, next-generation innovations--which represent only 14% of product launches and 38% of revenue--generate 61% of profits. Bottom line, according to Tassey: "We should invest more in next-generation technology."

Also at IRI's presentation, institute President Frank M. (Ross) Armbrecht Jr. addressed issues involved in conducting research abroad, in particular in China. Companies that already have labs there include Dow, Dupont, and GlaxoSmithKline.

China is by no means an idyllic location, Armbrecht cautioned. "Managing intellectual property [IP] is intricate," he explained. "People who say they own it may not," and it can leak out of a company as personnel move to other firms. Promises tend to be ephemeral. Infrastructure is also "more costly and fragile." It takes more time to manage a lab in China. And the justice system is unable to impose punitive penalties.

Nevertheless, Armbrecht noted that China is becoming more welcoming, having joined the World Trade Organization and worked to improve the human rights climate. China also is setting up its version of the U.S. Advanced Technology Program--a step that Japan and Switzerland are also taking.

In addition, Armbrecht said, "IP agreements are more easily reached with top universities" in China. Top universities in the U.S., on the other hand, "are tight with IP." The Chinese government bureaucracy is technophilic, he added. "They understand your terms. You're not talking to lawyers, as in the U.S."


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