Despite federal spending uncertainty, a case for optimism in research levels
Summary In the United States, R&D spending is likely to increase in 2014, turning the corner from near-zero growth in 2013. Federal funding is difficult to forecast because of the breakdown of orderly budget processes, but there are indications of bipartisan political support for increases or reallocations that favor R&D. Historic post-recession economic data suggest that private-sector R&D spending will also increase in 2014.
U.S. R&D investment will increase by 1.0% (after inflation) to $465 billion.
National research intensity will remain stable at 2.8% of GDP.
While government R&D funding is forecast to increase, flat or reduced spending are possibilities.
The private sector continues to account for about three-quarters of U.S. research activity.
The Source-Performer Matrix Estimated Distribution of U.S. R&D Funds in 2014Billions of Current U.S. Dollars (Percent Change from 2013)
The 2014 Source-Performer MatrixFour sources of R&D funding— the federal government, industry, academia and non-profit organizations—also perform R&D. Additional funding flows to academia from state and local governments. R&D is also performed by federally funded research and development centers (FFRDCs), some of which are operated for the government by industrial firms, non-profit research institutes or universities.Source: Battelle, R&D Magazine
Factors that Influence the 2014 Outlook for U.S. R&D
In the current economy, R&D jobs are multiplied 3.2X.Projected U.S. R&D spending of $465 billion will directly employ over 2.7 million U.S. residents in the private and public sectors. In turn, an additional 6 million U.S. jobs will be supported.
R&D spending is amplified 2.9XAs R&D spending ripples through the U.S. economy, it will generate an additional $860 billion in indirect economic impact.
Long-term economic growth is linked to research intensityThe most important example of long-term R&D impact is U.S. economic growth in the second half of the 20th century. Large research initiatives like the Human Genome Project or the War on Cancer also have high rates of social and economic return over the long term.
Except for a dip in the 1970s at the point where industry surpassed government as the dominant research sponsor, the U.S. total commitment to R&D has ranged between 2.5% and 3% of GDP for decades, according to historic data from the National Science Foundation. Research intensity has been correlated with macroeconomic growth, and has been the foundation of U.S. technological innovation. This evidence of impact and economic return may account for much of the stability in the portion of U.S. GDP which is devoted to research. In addition, there may be a stabilizing portfolio effect in the complementary roles of public and private research, as well as the diversity of societal objectives and commercial markets they encompass.
The reliable trend in research intensity continued in 2013 (2.8%), although multiple contemporary factors influence the prediction of 2014 activity. Among the most important are political and economic conditions in the U.S., as well as globalization of markets, companies, research capabilities and collaborations.
Some factors are relatively new and unpredictable. For example, the federal budget sequester is now a fiscal reality, despite originally intended as improbable. Arising from the Budget Control Act of 2011 (BCA), it has obvious direct effects on federal government appropriations, but it also introduces uncertainty into long-term programmatic and institutional research planning. Forecasting the net impact of sequestration in 2014 involves not only analysis of draft budgets, but also interpretation of activity and intentions in congressional committees, agencies and the White House, as well as leaders of research institutions.
Forecasting must also accommodate updates and corrections to historic economic data. For example, this 2014 Forecast incorporates a revision of the NSF’s 2011 baseline research expenditures1. In addition, preparation of the Forecast begins with analysis of actual 2013 results through the third calendar quarter, which allows refinement of the full-year estimate. We now project that 2013 U.S. R&D spending will reach $450 billion.
Taking such issues into account, the Battelle/R&D Magazine team forecasts that U.S. R&D activity will increase to $465 billion in 2014. This represents growth of 3.2% over the revised 2013 projection. Against the Office of Management and Budget’s estimate of 2.2% inflation for 2013-2014, the forecast level of R&D would be an increase of 1.0% in real terms.
R&D Funding in the U.S.: A Case for Optimism This Forecast assumes a 1.5% improvement in federal government R&D funding during calendar year 2014. However, the outlook involves substantial uncertainty. In one scenario, BCA-mandated continued reductions in non-defense discretionary spending could result in lower R&D funding. Another strong possibility is a series of short-term continuing resolutions, such as the one in effect at the end of 2013 in lieu of an approved budget, resulting in flat R&D spending. The third possibility is that R&D spending could increase either as the result of reallocation of sequestration, or from the passage of a budget.
This 2014 forecast is based on the third scenario. Reasons for making this optimistic assumption despite continuing economic and governance challenges include:
General acknowledgement that R&D investment has both short- and long-term return to the economy.
Concern about maintaining U.S. innovation-based competitiveness at a time when other nations are catching up in R&D spending, capability and output.
Apparent bipartisan support for publicly funded R&D. While policy priorities and objectives vary, expressions of support suggest that R&D may benefit under various budget and sequester-adjustment scenarios.
R&D intensive agencies like NIH, NSF, NIST and DOE’s Office of Science could receive some R&D increases via legacy commitments to innovation in the America COMPETES Act.
Moreover, as of this writing in late 2013, the administration, the House of Representatives and the Senate are considering increases to agency R&D budgets; the 1.5% growth figure noted above is the least among proposals under consideration.
Actual research expenditures in 2013 are also an important input to the 2014 Forecast. Though many individual firms and some industries increased their investment, industry investment in R&D as a whole was flat in 2013 due to the slow global economy, continued rationalization of R&D activities in selected industries and the private-sector impact of federal budgets and sequestration. The sequester-associated reductions in 2013 U.S. R&D had a pronounced effect on university research activity, among other areas. Industries that supply and support the federal government, notably aerospace, defense and security, were also subject to funding reductions and increased uncertainty. The impact on revenue led many firms to restrain internal R&D activity in 2013, and these cautious strategies are likely to continue in 2014.
Excluding federal R&D funding that flows through the private sector via grants, internal R&D cost recovery and other mechanisms, industry R&D funding is projected to rebound from 2013, increasing by 4.0% to $307.5 billion in 2014. The information and communications technology (ICT) sector will continue to be a particularly strong contributor.
There is historic evidence, including in recent years, that industrial R&D spending is correlated with the current economy and the stability of its outlook. Any economic destabilization from government shutdowns or defaults, international conflict or other factors could change the trajectory of private-sector R&D spending in 2014.
Where Nearly a Half-Trillion R&D Dollars are Spent The “performers” of research are identified by the NSF through surveys of R&D expenditures. The “Source-Performer Matrix” describes not only who will fund, but also who will consume R&D funding in the U.S. in 2014. The matrix is modeled on the NSF’s National Patterns of R&D Resources, as well as the most recent data (2011) from the NSF’s Business R&D and Innovation Survey (BRDIS).
Increased industry investment equates to more R&D activity, which is projected to increase by 3.8% to more than $330 billion, or more than 71% of the U.S. total. While about 8% of industry R&D activity is funded by the government (particularly the Department of Defense), most of the funding originates in the private sector and is correlated with the business cycle and economy rather than government actions.
As a group, the nation’s research universities are the second largest performer of U.S. R&D, accounting for 13% of the U.S. total, and more than half of all U.S. basic research. With nearly 60% of their R&D budget coming from the federal government, the recent dynamics of federal R&D funding, from increases via the American Recovery and Reinvestment Act (ARRA) investments in 2009-2011 to budget reductions in 2012 and sequestration in 2013, are causing some institutions to seek diversification of their R&D funding. From all sources, academic R&D performance is forecast to increase by 2.2% to nearly $63 billion in 2014.
Federal intramural research performance is forecast to reach $35.7 billion, or nearly 8% of all U.S. R&D, in 2014. When federally funded R&D centers (FFRDC) are taken into account, R&D worth $52.7 billion will be performed under close programmatic control of the federal government. Among the thirty-nine FFRDC’s are the U.S. national laboratories, many of which are operated by contractors. Through basic and applied research, these globally recognized institutions pursue missions in energy, security and other areas of national importance.