As 2012 approaches, U.S. investment in research has stabilized, but growth still lags previous years as a result of the sluggish economy. Given the current federal budget situation and announcements by a number of high-profile corporations regarding planned reductions in R&D spending, the stable, slow-growth trajectory that developed in 2011 will likely continue through 2012.
The Battelle/R&D Magazine team forecasts that U.S. R&D expenditures will grow by slightly more than 2.0%, from our final 2011 estimate of $427.2 billion to $436.0 billion in 2012. Against an estimated 2.0% inflation rate for 2012, this suggests that U.S. R&D investments will remain flat in real terms over the next year.
This detailed forecast of U.S. R&D investment is built upon data derived from the National Science Foundation's (NSF's) National Patterns of R&D Resources, a longitudinal database of U.S. R&D funding and performance. The most recent complete release of this database includes estimated data through 2008. Additional NSF data from more recent survey releases, including initial data from the Business R&D and Innovation Survey (BRDIS) and recent InfoBriefs, are incorporated to develop estimates through 2011. The 2012 R&D spending forecast involves information from various sections of this report, including information about federal R&D budgets, corporate R&D expenditures and plans, and the general condition of the U.S. and global economies.
The Source-Performer Matrix
The U.S. forecast is presented as the source-performer matrix, detailing the flow of funds between entities that fund R&D and those that perform it. The components of the matrix are identified by the NSF through its surveys of R&D expenditures. Integration within the U.S. research enterprise is reflected by the matrix because the four key sources of R&D funding—government, industry, universities, and non-profits—also perform R&D activities. Additional funding flows to academia from other government entities (state and local). To date, the National Patterns data series has not tracked specific state and local funding to industrial R&D performers. As a result, this funding—which could come from economic development incentives, innovation grants like the State of Ohio's Third Frontier program, etc.—is not represented. A fifth set of R&D performers, federally funded research and development centers (FFRDCs), receive most of their operational funding and programmatic objectives from the federal government. Some major FFRDCs, including most of the DOE's national laboratories, are operated for the government by contractors, and also collaborate with the private sector to perform research and transfer technology.
Significant Factors and Assumptions in the 2012 Forecast
The 2012 forecast of U.S. R&D investments and performance embodied in this source-performer matrix is shaped by five principal factors.
Guarded optimism and continued stability
Industry leaders, economists, and consumers generally expect that the economy will be better in 2012 than in 2011, and definitely improved over 2010. Reflecting this view, 81% of industry survey respondents estimate that their R&D budgets will increase or stay the same for 2012 (at least in current dollars). The link between R&D performance and the national economy, however, is not as strong or direct as one might suppose. Historically, the National Patterns data have indicated stability and inertia in R&D performance. Significant economic swings are often reflected in the funding and performance data, but dampened in magnitude, with the R&D impact declining more slowly and returning to long-term growth vectors more quickly than the economy as a whole. This finding is amplified by our industrial survey respondents, only 36% of whom state that the economy has a significant effect on their R&D budgets.
Continued tightening of federal R&D budgets
As discussed in the next section, federal R&D budgets, though more resilient than total government spending against significant budget reductions, will again see declines across many agencies. Administration and congressional support for basic research activities will likely minimize the impact on basic science agencies such as the National Institutes of Health (NIH), NSF, and the U.S. Department of Energy's Office of Science. However, the growth trajectory for these national science and innovation assets, as envisioned in the America Creating Opportunities to Meaningfully Promote Excellence in Technology, Education, and Science Act (America COMPETES Act), will be subdued, limiting the research that they perform directly as well as the significant amount that they fund at U.S. universities.
Increased expectations for R&D ROI
Economic uncertainty in public and private sectors has caused R&D sponsors to pay new attention to measurable returns on research investments. One key example is the pharmaceutical industry, which faces increased scrutiny of R&D spending versus limited productivity and weak pipelines for blockbuster drugs. In response, many pharmaceutical companies are not only dampening their projections for R&D expense, but are announcing annual cuts of $1 billion or more over the next few years. The private sector is not alone in expectations for improved R&D ROI. With the difficult U.S. budget situation and the significant resources invested by the federal government in research, development, and testing activities, Congress, the General Accounting Office, the administration, and the public are demanding improved return on research investments in the form of economic and policy outcomes.
Revised federal expenditure reporting
Due to our reliance on the NSF’s National Patterns data as the foundation of our estimates, significant adjustments to these data affect the levels and directions of our forecast. For example, after the release of our 2011 forecast, the NSF issued an InfoBrief entitled Department of the Air Force Revises R&D Data for FY 2000–07. This report detailed upward adjustments to the Air Force's R&D obligations, ranging from $3 billion in 2000 to nearly $14 billion in 2007. In the context of our forecast, this historical change will also reset the federal R&D funding baseline by nearly $14 billion starting in 2007. At this revised level, total U.S. R&D is also increased, which in turn increases the R&D share of the gross domestic product.
Continued effect of ARRA
Congress required that American Recovery and Reinvestment Act (ARRA) stimulus funds be committed to specific projects by the end of the government's 2010 fiscal year. However, the actual expenditure of ARRA funds by R&D performers will continue through calendar years 2011 and 2012, and is expected to continue into 2013 for some larger-scale research projects. These multi-year expenditures continue to add to the forecast’s federal source line of the source-performer matrix.
Details on U.S. R&D Funding Sources
The description and analysis of the 2012 forecast begin with a discussion of the major sources of U.S. R&D funding. This discussion focuses on the magnitude, nature, and distribution of these funds to the various performers.
Federal Funding of R&D
With the potential for significant reductions in discretionary budgets across the board, consideration of federal R&D funding involves finding ways to support research and innovation as drivers of growth and competitiveness, while containing costs. Philosophical disagreements are also a factor for some key research areas. Nevertheless, in the FY 2012 budget process, most of the reductions from last year's appropriations or changes from this year's administration requests have resulted from a tempering of growth rates for specific programs. This level of debate was enabled, in part, by an administration directive to reduce agency FY 2012 budgets by at least 5% and to eliminate low-priority programs and investments.
Though the federal FY 2012 budget remains a work in progress, our budget estimates lead to a forecast with federal funding reaching $125.7 billion in 2012, down 1.6% from our final estimate of $127.7 billion for 2011. With the exception of academia, which sees an increase of less than 1% in federal R&D funding, all other performers are down by more than 2% from 2011. The slight increase in academic R&D relates to ARRA expenditures, which will likely account for 10% or more of the total federal funds spent by academic institutions on R&D in 2012.
Industry Funding of R&D
Industrial funds for R&D will reach $280 billion in 2012, an increase of 3.7% over our final 2011 estimate of $270 billion. At 64% of all U.S. funding, the industrial private sector is a major driver, particularly of applied research and development. The nearly $10 billion increase in industrial funding accounts for all of the growth in the U.S. R&D enterprise from 2011 to 2012.
Of the $280 billion, 98% stays internal to industry performers, either directly or through outsourcing arrangements with other industry performers, although a small shift has begun. Based upon industry press and media accounts, we forecast a large increase (26.5%) in the level of industrial funds to academia in 2012 as firms embrace open and collaborative innovation. This amounts to an increase of $800 million, for a total of $3.9 billion in 2012. Similarly, an increase of 8.9% from 2011 to 2012 is forecast for industry funding to non-profit research institutes, amounting to $2.1 billion. Finally, industry funding to FFRDCs increases by 2.2% to $0.2 billion in 2012.
Other Funding of R&D
Beyond federal government and industry R&D funding, other sources provide important niche funding to U.S. R&D performers, especially within academia. Academic internal funds and non-profits (primarily foundations) provide research funding of $12.3 billion and $14.5 billion, respectively. Not surprisingly, these two sources are strongly engaged in intramural funding, with 100% of university funds supporting the performance of academic research and 76% of non-profit funding supporting other non-profits, including internal research funding within non-profit research institutes. With another $3.8 billion from non-federal government sources going completely to universities, these three sources combine to account for 7.0% of all U.S. R&D funding.
Details on U.S. R&D Performers
The other axis of the 2012 source-performer matrix illustrates the roles of the federal government, industry, academia, and non-profit organizations in undertaking research.
Federal Performance of R&D (including FFRDCs)
As federal resources have become more constrained over the past few years, intramural research functions have been asked to do more with less, even with the influx of ARRA funds to some federal research facilities. Intramural research is estimated to decline for the fourth consecutive year, with budget reductions (down 2.5%) exceeding overall federal R&D budget declines (down 1.5%). Total federal intramural research will reach $29.2 billion in 2012, down from nearly $30 billion in 2011.
The forecast performance level of FFRDCs is affected by anticipated reductions in federal R&D funding in 2012. The FFRDC level will reach $14.9 billion in 2012, down 2.4% from $15.2 billion in 2011.
Industry Performance of R&D
Total performance of R&D by industry will reach $311.1 billion in 2012, an increase of 2.6% over our final estimate of $303.1 billion in 2011. This growth rate is somewhat dampened by recent announcements of planned R&D reductions within the pharmaceutical industry in 2012. The majority of this funding comes from internal R&D resources, accounting for 88% of total industry R&D funding, with the growth in industry internal funding accounting for all of the increase in total industry funding. Industry will receive $37.6 billion from the federal government, accounting for the remaining 12% of funding. This amount is a decline of 2.4% over 2011 and primarily relates to reductions in DOD research expenditures.
Academic Performance of R&D
Sources of funding for academic research appear likely to continue placing a philosophical and programmatic priority on the basic and applied research performed by academia. This is demonstrated as funding for academic research will increase, albeit at different rates, across all sources of funds; even as the overall budgets of these research sponsors continue to be constrained. The performance of R&D by academia will increase by more than 2.8% in 2012, reaching $60.9 billion—a level that continues to be buoyed by ARRA-related expenditures.
The federal government, the primary funder of academic R&D, will provide less than a 1.0% increase, reaching $37.4 billion in 2012, as both NIH and NSF R&D budgets are projected to resist significant cuts in extramural funding programs. The second-largest share of academic R&D funding will come from institutions' own internal funds, including annual research and departmental budgets and endowments. The largest percentage increase to academic R&D performers will come from industry, continuing to look for open innovation partners or avenues to outsource additional, typically basic, research activities. This 26.5% increase, the only double-digit percentage increase in the 2012 U.S. forecast, will bring industry funding of academic R&D to nearly $3.9 billion in 2012.
Non-Profit Performance of R&D
Non-profit research institutions will see an increase of 1.6%, reaching $20 billion in 2012. These institutions will face similar reductions in federal funding as most other performers, with a decline of 2.3%. However, increases in both industry funding (8.9%) and internal or other non-profit support (2.7%) may offset these federal reductions.