Advertisement
Articles
Advertisement

Re-Emerging U.S. R & D

Tue, 12/22/2009 - 6:29am
Martin Grueber, Research Leader, Battelle, Cleveland, Ohio and Tim Studt, Editor in Chief, Advantage Business Media

2010 R&D Global Funding Forecast logoDespite the negative economic climate and severe economic recession underway at the end of 2008 and through much of 2009, the Battelle/R&D Magazine team forecasts the U.S. R&D environment will begin to re-emerge in 2010, with total R&D spending reaching $401.9 billion, up 3.27% over the final 2009 estimate of $389.2 billion, and will surpass the $400 billion level for the first time. When adjusted for the anticipated 2010 inflation of 1.5%, the 2010 total is lowered to $395.9 billion, yet still achieves a growth rate of 1.7% over 2009.

This level of R&D activity will not be easy to achieve, and continued economic uncertainty may ultimately impact R&D funding and performance even more than we expect. But as we explain in this report, a number of factors weigh in favor of a fairly quick improvement over 2009 levels.

This 2010 U.S. forecast is built upon a data foundation detailed in the National Science Foundation’s (NSF) National Patterns of R&D Resources, a longitudinal database of the sources of R&D funding and the structure of R&D performance. The forecast draws upon a number of additional resources, including our detailed surveys of R&D performers; R&D budget information compiled by the White House Office of Science and Technology Policy (OSTP) and the American Association for the Advancement of Science (AAAS); information on ARRA budgets and awards from Recovery.gov and related agency Web sites; secondary data from a variety of sources; and corporate financial reporting to the U.S. Securities and Exchange Commission. Ultimately, estimation and interpretation of recent data are required, due to various collection time lags and non-disclosed data, to develop the final 2010 forecast.

Characterizing the U.S. R&D Enterprise
To allow for easier interpretation of funding flows and performance within the U.S. R&D enterprise, the forecast is portrayed in the form of a source-performer (S-P) matrix, capturing within the cells of the matrix each existing source-performer relationship. Based upon the structure established by the NSF, R&D funding comes from five potential sources: the Federal Government, Industry, Academia (universities and colleges), Other Government (state and local), and Non-Profit (primarily foundations). Five types of R&D performers are identified by NSF: the Federal Government, Industry, Academia, Federally-Funded Research and Development Centers (FFRDCs—large research centers and complexes funded by various agencies within the federal government, but managed by industry, university, or non-profit operators), and Non-Profit Organizations (primarily research institutes and the like).

The U.S. Source/Performer Matrix
Estimated Distribution of R&D Funds in the U.S. in 2010
Millions of Current U.S. Dollars, Percent Change from 2009
(Source: R&D Magazine, Battelle

SOURCE

PERFORMER

 

Federal Gov’t

Industry

Academia

FFRDC (Federally Funded R&D Center)

Non-Profit

TOTAL

Federal
Government

$28,308
1.70%

$27,114
2.34%

$36,284
8.03%

$16,032
4.21%

$6,393
3.28%

$114,131
4.24%

Industry

 

$255,892
2.85%

$2,888
3.64%

 

$1,521
1.38%

$260,302
2.85%

Academia

 

 

$11,635
5.07%

 

 

$11,635
5.07%

Other
Government

 

 

$3,277
-1.35%

 

 

$3,277
-1.35%

Non-Profit  

 

$4,212
4.40%

 

$8,362
2.08%

$12,574
2.84%

TOTAL

$28,308
1.70%

$283,007
2.80%

$58,296
6.37%

$16,032
4.21%

$16,276
2.48%

$401,919
3.27%

* Federally Funded R&D Center
Source: Battelle, R&D Magazine

 

Assumptions in the 2010 Forecast
The magnitude, stability, and flows within the source-performer matrix are impacted by a varied set of factors each year. For this year, four significant factors are identified that together shape much of the 2010 forecast.

1 - Substantial declines in industrial R&D
Even as the recession was taking hold in 2008, the nature of R&D budgeting and performance had many firms holding fast with their 2008 budgets, which were typically established in late-2007, or very early-2008, under less severe economic conditions. In fact, a recent survey by Booz and Co. found that R&D spending was indeed steady in 2008, finding that the world’s biggest corporate R&D spenders stuck with their innovation programs despite the recession. Indeed, more than two-thirds of the companies surveyed maintained or even increased their R&D spending in 2008.

However, as has been discussed numerous times in these annual forecasts, it is either often difficult or not a viable option to cut an annual R&D budget within the course of a year, which in turn provides a level of year-to-year inertia to R&D budgeting. But, as the table “U.S. Companies’ Recent R&D Expenditures” shows, many leading companies, though definitely not all, made substantial reductions in their R&D expenditures over the first three quarters of calendar 2009. According to an R&D Magazine survey, 38% of the industrial respondents saw their budgets decline from 2008 to 2009. What is perhaps more important from the perspective of the total U.S. R&D enterprise is that an even greater share of the largest industrial R&D performers saw significant budget cuts. A total of 44% of the industrial respondents with R&D budgets exceeding $1 billion faced budget decreases of 5% or more in 2009.

VIEWPOINT
A Battelle Perspective on Investing in Innovation

Ron Townsend-Battelle Ron Townsend,
Executive VP,
Battelle Global Laboratory Operations

2 - The impact of the ARRA
As detailed in our mid-year update (July 2009), the American Recovery and Reinvestment Act, or simply the Economic Stimulus Package, provided an additional $18.4 billion for R&D efforts and related facility construction, above and beyond departmental FY 2009 baseline budgets. Based upon the departments and agencies receiving these ARRA R&D funds, it is almost certain a vast majority of this specific ARRA funding is likely to flow to academic awardees. In fact, over 70% of these funds are presumed to be slated for individual researcher/center grants from the National Institutes of Health (NIH) and the NSF—a “down payment” on increased basic research funding. The impact of these “stimulus” investments could be a pronounced, but short term, will boost the federal funding to the academic performers (with much smaller impacts on federal, industry, FFRDC, and non-profit performers).

The timing of this R&D-focused stimulus funding, however, could be delayed to some degree. The federal departments and agencies are only required to have these funds “obligated,” or awarded to a researcher/institution by the end of FY 2010, not specifically spent as an “outlay” to the awardees by then. For example, based on estimates from the weekly Recovery.gov reports of the key R&D departments and agencies, less than 5% of the funds obligated through FY 2009 ARRA awards have been received by the awardees. Given the nature of scientific research and contracting/reimbursement processes, this funding will in fact flow out at a less impactful, though slightly longer-term, pace from now through FY 2012.

3 - Federal increases in basic research
A strategic investment course initiated via the American Competitiveness Initiative (ACI)/America COMPETES Act under the Bush administration, and thus far restored/continued under the Obama administration renews, establishes a federal priority and role for investing in basic research (principally as funded and managed within the NSF, the Department of Energy’s Office of Science, and the National Institute of Standards and Technology (NIST)). This investment course, if fully enacted, will double the funding to these agencies for basic research activities by 2016. When the NIH budget was set on a path to be doubled between FY 1999 and FY 2003, this process led to a recognizable increase in academic (and to a lesser degree non-profit) funding in these years. A similar pattern is expected under the ACI.

Additional resources are also, once again, being directed toward the NIH. Since the completion of the NIH “doubling” the agency (one of the largest supporters of academic R&D) had its budget held virtually flat. Using a combination of ARRA funding and increased budgetary requests under the Obama administration a new “doubling” of funding for cancer-related research has been initiated for the NIH.

4 - Economic recovery likely
While in late 2009 no one is willing to say the U.S. and global economies are completely out of the woods, qualitative and quantitative data suggest that from at least a financial perspective, the economy is beginning to turn around. It may be a significant amount of time, however, before employment levels begin to increase. Recent forecasts for a late 2009/2010 recovery range from the Survey of Professional Forecasters’ 2.3% growth for both 2009 H2 and 2010 to the Wall Street Journal’s 2.9% growth forecast for 2010.

It is important to note that even with the significant effects of these four preceding factors, the level of stability and inertia within the U.S. R&D enterprise tends to dampen many potential year-to-year swings in R&D funding and performance.

 /sites/rdmag.com/files/legacyimages/RD/Featured_Articles/2009/12/GFF2010_page34.gif 
click to enlarge

Source Details
We begin the description and analysis of the forecast with a discussion of the major sources of funding for U.S. R&D. This discussion focuses on the overall magnitude, nature, and distribution of these funds to the various sources.

Federal Funding of R&D
Total federal government funding of R&D has demonstrated a fairly consistent pattern of year-to-year current dollar increases, albeit in some years very small increases and from 1999-2003 much larger increases due to the doubling of NIH research funding. This consistency is further demonstrated by that fact that since 1981, in only three years (1991, 1994, and 1996) did federal R&D funding actually decline from the previous year in current dollars. However, even with this steady growth, federal support for R&D has become an ever smaller share of overall U.S. R&D support. Whereas in the early- to mid-1980’s federal funding accounted for approximately 45% of all R&D funding, it now is down to approximately 26% of all R&D funding support during the last few years.

The federal efforts to increase support for basic research through both core budget increases and the ARRA “down payment” toward this goal is expected to cause a subtle increase in the federal share of total R&D support over the next few years. This increasing share is not completely due to the overall size of these increases in federal support, but rather occurs in conjunction with forecast near-term reductions in industry support. How significant the share increase becomes depends upon the ultimate flow of the ARRA funding. Much of the impact will not be felt until 2010 and beyond, as most of 2009 involved “awarding” funds.

Based upon these dynamics, the 2010 forecast projects an overall 4.24% increase over the final 2009 estimate, reaching $114.1 billion in total federal support. That will be up from $109.5 billion in 2009. At this level, federal R&D support will account for slightly more than 28% of the total U.S. support for R&D.

Using our estimates of funding flows from the ARRA over the FY 2009 through FY 2012 period discussed earlier, total federal funding would reach only $108.0 billion in 2010 without the additional ARRA funding. At this level, total U.S. R&D would only reach $395.8 billion in 2010; thus, the federal ARRA investment in 2010 allows overall U.S. R&D to slightly exceed inflation.

The distribution of these federal funds, while it has changed over time, also has demonstrated a surprising level of consistency and inertia since 1981. The major change has been the decline in federal support for corporate/industry R&D, from a 44% share in 1981 to approximately 24% over the past few years. This decline was essentially supplanted with an increasing level of support for R&D within academia, up from 14% in 1981 to around 30% over the last decade. The share of federal support devoted to federal intramural research, the FFRDCs, and to non-profit performers, has remained extremely steady, fluctuating up or down by perhaps one or two percentage points from 25%, 14%, and 5%, respectively, during this 30-year period.

 /sites/rdmag.com/files/legacyimages/RD/Featured_Articles/2009/12/GFF2010_page36.gif 

click to enlarge

Industrial Funding of R&D
The forecast establishes a 2010 level of industrial support for R&D reaching $260.3 billion, up 2.85% from the final 2009 estimate of $253.1 billion (which was an estimated 5.5% decline from 2008). Some may believe this to be an overly optimistic or “bullish” forecast, especially when there has often been a lag in R&D funding after a recession. However, given the opinion of leading economic forecasters that the overall global economy will be well into its recovery in 2010, we believe this will have a positive impact on future growth. Furthermore, with the perhaps serendipitous luck that the economic crisis occurred after 2008 R&D budgets were established and underway, and that the recovery is beginning (or at least seen as a light at the end of the tunnel) as 2010 R&D budgets are being developed, we are predicting that the overall declines in 2009 will be a thing of the past in 2010. (They may well still be a factor in certain industry segments.) At this rate of growth and ultimate level in 2010, industrial funding for R&D will account for 64.8% of all U.S. R&D support.

U.S. Companies’ Recent R&D
(millions U.S. dollars)

  Q1-3 Q1-3 Change
  2008 2009 2008-09
Software/IT/Internet
Microsoft $7,017 $6,617 -5.7%
IBM $4,808 $4,360 -9.3%
Google $2,060 $2,107 2.3%
Apple $888 $1,057 19.0%
Yahoo $943 $904 -4.2%
 

Electronics/Computer Hardware

Intel $4,406 $4,050 -8.1%
Cisco Systems $4,239 $3,747 -11.6%
Motorola $3,101 $2,390 -22.9%
Texas Instruments $1,509 $1,118 -25.9%
AMD $1,383 $1,289 -6.8%
 

Biopharmaceuticals

Pfizer $5,642 $5,032 -10.8%
Johnson & Johnson $5,469 $4,773 -12.7%
Merck $3,419 $3,874 13.3%
Lilly (Eli) $2,782 $3,110 11.8%
Bristol-MyersSquibb $2,442 $2,590 6.1%
 

Other Advanced Technology/Manufacturing

Boeing $2,614 $2,798 7.0%
United Technologies $1,281 $1,137 -11.2%
Caterpillar $1,221 $1,066 -12.7%
3M Co. $1,058 $967 -8.6%
DuPont $1,050 $989 -5.8%
Dow Chemical 1,000 $1,073 7.3%
Source: SEC, Battelle

 

It is possible our 2010 R&D growth “rate” may be spot on, but if there are more significant economic declines affecting some companies and industries than even we accounted for in our 2009 estimations, it is possible that overall industrial R&D might fall short of the $260 billion mark in 2010. For example, while we accounted for significant automotive R&D declines in 2009, it is difficult to get a clear read on company R&D budgets given the lack of publicly available data. Given the importance of the automotive industry R&D to the overall U.S. R&D enterprise, more severe cuts in 2009 automotive R&D will ultimately drop the 2009 base from which the 2010 forecast is made.

Compared with other segments, industry spending on R&D has demonstrated an even more stable distribution over the last 30 years. Consistently, 98% (plus or minus .5%) of industry R&D funding stays within the industry context, with the remaining 2% invested in academic or non-profit research.

Other Funding for R&D
Combined, the federal government and industry provide over 93% of all U.S. funding for R&D. Though a small share of total R&D funding, support from the other three funding sources, (non-profits, academia, and other government) is nonetheless important in providing resources to unique lines of inquiry or to efforts with potential economic benefit to the regions in which the performers reside.

Of the remaining R&D support, we forecast funding from non-profit organizations to reach nearly $12.6 billion (typically generated through endowments and charitable contributions) at a growth rate of 2.84%. Though growing, this rate is still depressed from historical levels, as the impact of both investment and economic crises still affect the ability of this sector to invest in research efforts. Funding from academic institutions (typically generated through general institutional support, endowments, and royalties) is expected to reach $11.7 billion in 2010, an increase of slightly more than 5% from $11.1 billion in 2009. Again, this growth rate is impacted by the economic climate over the 2008-2009 period. Finally, other government, i.e., state and local R&D support is expected to decline by 1.35% from 2009 to 2010 that followed a final forecasted decline of 3.80% from 2008 to 2009, due to the extreme fiscal pressures state and local governments are facing and are forecast to face for some time.

Performer Details
Examination of the performance dimension of the S-P matrix leads to a more detailed understanding of the role that industry, academia, and non-profit organizations play in the conduct of U.S. R&D.

Federal Performance of R&D
Federal funds for federally-performed R&D (intramural research), while increasing in current dollar terms by 1.70% to $28.3 billion in 2010, have been steadily declining as a share of overall U.S. R&D. Federal government-performed research accounted for just under 7% in recent years. Due to the support provided through the ARRA to certain federal research efforts and facilities, its share is expected to increase slightly in 2009 and 2010 to just over 7%. It is important to note that while the conduct of this intramural research is important, from a funding perspective these intramural resources account for just under 25% of all federal R&D investment on an annual basis.

Industrial Performance of R&D
Overall, industry R&D performance in the U.S. (funding from all sources) will reach $283.7 billion in 2010, an increase of 2.8% (over $7.7 billion) from 2009, but still down 2.1% from 2008. This indicates that from a performance perspective, while we see a rebound from 2009, it will take more than a year to reach the levels of just two years ago, even in current dollars.

While the importance of open innovation and other mechanisms for industry to connect to external research efforts are becoming more commonplace, the fact remains that industry primarily looks to itself or other firms when investing in and performing R&D. More than 98% of all industrial R&D funding stays within the industry performer segment, and this level has been extremely stable for at least the last decade.

Industry performance of its own R&D, or contract research for other companies or industries, will reach $255.9 billion in 2010, up 2.85% over 2009, down more than 5.5% over 2008 levels. Industry-supported and performed R&D drives overall U.S. R&D, as this $256 billion level of effort accounts for nearly 64% of the total U.S. R&D enterprise.

Two things will be important to monitor in 2010 industrial R&D performance to understand the health and future prospects for the U.S. industrial R&D. First, do significant industry segments, e.g., electronics/computer hardware and biopharmaceuticals, quickly return to a more robust R&D portfolio? It will be an important factor for long-term competitiveness that a substantial portion of this 2010 increase come from firms that made cuts in 2009 but are now getting back on track and increasing their 2010 performance as their financial situations improve. Second, as R&D budgets tighten, there tends to be a further shift of resources toward shorter-term, nearerbenefit development efforts at the expense of research with longer time horizons that seek transformational innovations and technologies. As the ability to expand R&D budgets returns (though for some firms it may never return to previous levels), are these resources used to re-engage with existing research areas, used as a mechanism to pursue different lines of research, or seen as a chance to pursue external innovations and opportunities?

Academic Performance of R&D
Academic R&D performance is forecast to reach $58.3 billion in 2010, an increase of 6.37% over $54.8 billion in 2009. What is most surprising about academic R&D is the extreme stability in the distribution of its support. With only very minor year-to-year fluctuations, the mix of investment in academic R&D is characterized by a general portfolio of 60% federal funding, 20% internal (university and college) funds, and 20% from industry, state and local governments, and nonprofit sources.

FFRDC Performance of R&D
As their name suggests, the 39 current FFRDCs, though managed by industry groups, universities, or non-profit organizations, receive their R&D funding almost exclusively from the federal government. The FFRDCs are forecast to receive $16.0 billion in federal R&D support in 2010, an increase of 4.21% over $15.4 billion in 2009. Much of this increase stems from the nearly $1.6 billion in ARRA funding likely headed to the FFRDCs from the Dept. of Energy’s Office of Science.

Non-Profit Performance of R&D
Overall, research performed by nonprofit institutions will reach $16.3 billion in 2010, an increase of 2.48% over $15.9 billion in 2009. Self-funding or support from other non-profit sources is the largest share of funding for non-profit R&D, accounting for over 51% of the R&D resources. The federal government is the second largest supporter of non-profit performed R&D, reaching nearly $6.4 billion in 2010, and accounts for 39% of all non-profit research support. Finally, non-profit research organizations will perform just over $1.5 billion in research for industrial funders in 2010.

 

Advertisement

Share This Story

X
You may login with either your assigned username or your e-mail address.
The password field is case sensitive.
Loading