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Chapter 4. R&D: National Trends and International Comparisons

Federal R&D

The U.S. government supports the nation's R&D system through various policy tools. The most direct is federal performance and funding of R&D. This section provides statistics on these federally performed or funded activities, including budget authority by national objectives, obligations by agency, and obligations by research field (for definition of these terms see sidebar, "Federal Budgetary Concepts and Related Terms"). This section also covers federal tax credits for business R&D.

Federal R&D Budget by National Objectives

Federal support for the nation's R&D spans a range of broad objectives, including defense, health, space, energy, natural resources/environment, general science, and various other categories. To assist the president and Congress in planning and setting the federal budget and its components, the Office of Management and Budget classifies agency budget requests into specific categories called budget functions. These functions include a number of categories that distinguish the various R&D objectives. Descriptions of the budget authority provided annually to federal agencies in terms of these R&D budget functions afford a useful picture of the present priorities and trends in federal support for U.S. R&D.

In FY 2009, budget authority for federal agency spending on R&D totaled an estimated $156.0 billion, including a one-time $15.1 billion increase provided under the American Recovery and Investment Act of 2009 (appendix tables 4-28 and 4-29).

Defense-Related R&D

As in previous years, defense was the largest of the R&D budget functions, accounting for 55% ($85.2 billion) of the total. Defense R&D is supported primarily by the Department of Defense (DOD), but also includes some R&D by the Department of Energy (DOE) and the Department of Justice (where some R&D by the Federal Bureau of Investigation comes under a defense category).

Defense has accounted for the majority of R&D budget authority throughout the last two decades (figure 4-10, appendix table 4-28); the share has fluctuated year to year in the 50%–70% range. In FY 1980, it roughly equaled nondefense R&D, but by FY 1985 it was more than double. From 1986 to 2001, nondefense R&D surged, and the share of defense R&D shrank to 53%. After September 11, 2001, defense R&D became more prominent, accounting for 59% of the federal R&D budget in FY 2008. The drop to 55% in FY 2009 reflects chiefly the effect of the one-time ARRA spending authority that expanded health, energy, and general science research.

Nondefense R&D

Budget authority for nondefense R&D totaled $70.8 billion in FY 2009, or about 45% of the total that year (appendix table 4-28). Nondefense R&D includes health, space research/technology, energy, general science, natural resources/environment, transportation, agriculture, education, international affairs, veterans' benefits, and a number of other small categories related to economic and governance matters.

The most striking change in federal R&D priorities over the past two decades has been the considerable increase in health-related R&D—which now accounts for well over half of all nondefense R&D (figure 4-10). Health R&D has risen from about 12% of total federal R&D budget authority in FY 1980 to 21% in FY 2008 and 26% in FY 2009 because of the ARRA increment. The increase in share accelerated after 1998, when policymakers set the National Institutes of Health (NIH) budget on course to double by FY 2003.

The budget allocation for space-related R&D peaked in the 1960s, during the height of the nation's efforts to surpass the Soviet Union in space exploration. It stood at 10%–11% of total R&D authority throughout the 1990s. The loss of the space shuttle Columbia and its entire crew in February 2003 prompted curtailment of manned space missions. In FY 2005, the space R&D share was down to about 6%; by FY 2009, it had declined to around 4%.

Federal nondefense R&D classified as general science had about a 4% share of total federal R&D in the mid 1990s, growing to 8% in FY 2009. However, this change reflected chiefly a reclassification, starting in FY 1998, of several DOE programs from energy to general science.

Federal Budget for Basic Research

In FY 2009, federal budget authority for all basic research totaled $36.4 billion (appendix table 4-29). This represented some 23% of the $156.0 billion of total federal budget authority for R&D that year. The vast majority of basic research reflects the budgets of agencies with nondefense objectives, such as general science (notably NSF), health (NIH), and space research and technology (NASA).

Over the past several years, budget authority levels for basic research have been mostly flat, after adjusting for inflation, excepting the 2009 ARRA boost. In FY 2002, basic research budget authority was $25.8 billion (constant 2005 dollars); in FY 2008, $26.4 billion; and $33.0 billion in FY 2009.

Federal Spending on R&D by Agency

Budget authority, discussed above, lays out the themes of the broad federal spending plan. Federal obligations reflect federal dollars as they are spent, that is, the implementation of the plan by federal agencies (see appendix tables 4-30 and 4-31).

In FY 2009, federal obligations for R&D and R&D plant together totaled an estimated $137.0 billion: $133.3 billion for R&D and an additional $3.6 billion for R&D plant (table 4-16). Federal obligations for R&D have, in general, increased annually on a current-dollar basis since the mid-1990s (figure 4-11). Earlier figures are $68.2 billion for R&D in FY 1995 and an additional $2.3 billion for R&D plant, $75.9 billion and $4.5 billion in FY 2000, $118.9 billion and $3.8 billion in FY 2005 (appendix table 4-30). When adjusted for inflation, however, the growth has been slower after FY 2005. NSF's latest statistics indicate that the boost to R&D from the ARRA appropriations translated to an additional $10.1 billion of federal R&D obligations in FY 2009—$8.7 billion for R&D, another $1.4 billion for R&D plant, with the main recipients the Department of Health and Human Services (HHS), NSF, and DOE (table 4-16).

(The figures for federal funding of U.S. R&D cited in table 4-1 earlier in this chapter are somewhat lower. These earlier figures are based on performers' reports of their R&D expenditures from federal funds. This difference between performer and source of funding reports of the level of R&D expenditures has been present in the U.S. data for more than 15 years and reflects various technical issues. See sidebar, "Tracking R&D: The Gap between Performer- and Source-Reported Expenditures.")

Fifteen federal departments and a dozen other agencies engage in and/or fund R&D in the U.S.[21] Seven departments/agencies that reported spending on R&D in excess of $1 billion annually accounted for 97% of the total (table 4-16). Another eight of the departments/agencies reported spending above $100 million annually.

Department of Defense

In FY 2009, DOD obligated a total of $68.2 billion for R&D and R&D plant (table 4-16)—which represented half (50%) of all federal spending on R&D and R&D plant that year. Nearly the entire DOD total was R&D spending ($68.1 billion) with the remainder spent on R&D plant.

Twenty-seven percent ($18.7 billion) of the total was spending by the department's intramural labs, related agency R&D program activities, and FFRDCs (table 4-16). Extramural performers—private businesses, universities/colleges, state/local governments, other nonprofit organizations, and foreign performers—accounted for 73% ($49.5 billion) of the obligations, with the bulk going to business firms ($46.3 billion).

Considering just the R&D component, relatively small amounts were spent on basic research ($1.7 billion, 3%) and applied research ($5.1 billion, 7%) in FY 2009 (table 4-17). The vast majority of obligations, $61.3 billion (90%), went to development. Furthermore, the bulk of this DOD development ($54.9 billion) was allocated for "major systems development," which includes the main activities in developing, testing, and evaluating combat systems (figure 4-12). The remaining DOD development ($6.4 billion) was allocated for "advanced technology development," which is more similar to other agencies' development obligations.

Department of Health and Human Services

HHS is the main federal source of spending for health-related R&D. In FY 2009, the department obligated an estimated $35.7 billion for R&D and R&D plant, or 26% of the total of federal obligations that year. Nearly all of this was for R&D ($35.6 billion). Furthermore, much of the total, $34.6 billion, represented the R&D activities of the NIH. Obligations from the ARRA-appropriated funds totaled $4.9 billion for HHS in FY 2009, the largest by far of all the federal agencies (table 4-16). Again, nearly all of this was NIH R&D.

For the department as a whole, R&D and R&D plant obligations for agency intramural activities and FFRDCs accounted for 21% ($7.5 billion) of the total. Extramural performers accounted for 79% ($28.2 billion). Universities and colleges ($20.5 billion) and other nonprofit organizations ($5.3 billion) conducted the most sizable of these extramural activities (appendix table 4-31).

Nearly all of HHS R&D funding is allocated to research—almost 53% for basic research and 47% for applied research (table 4-17).

Department of Energy

DOE obligated an estimated $11.6 billion for R&D and R&D plant in FY 2009, about 8% of the federal obligations total that year. Of this amount, $9.9 billion was for R&D and $1.7 billion for R&D plant. Obligations this year stemming from the ARRA appropriation totaled $2.2 billion, the third largest among the agencies (behind HHS and NSF).

The department's intramural laboratories and FFRDCs accounted for 77% of the total obligations. Many of DOE's research activities require specialized equipment and facilities available only at its intramural laboratories and FFRDCs. Accordingly, DOE invests more resources in its intramural laboratories and FFRDCs than other federal agencies. The 23% of obligations to extramural performers were chiefly to businesses and universities/colleges.

For the $9.9 billion obligated to R&D, basic research accounted for 41%, applied research 32%, and development 27%. DOE R&D activities are rather evenly distributed among defense (much of it funded by the department's National Nuclear Security Administration), energy, and general science (much of which is funded by the department's Office of Science).

National Science Foundation

NSF obligated $6.9 billion for R&D and R&D plant in FY 2009, or 5% of the federal total. Extramural performers, chiefly universities and colleges ($6.6 billion), represented 96% of this total. ARRA-related obligations were $2.2 billion (R&D and R&D plant), the second largest among the agencies. Basic research accounted for about 92% of the R&D component. NSF is the federal government's primary source of funding for academic basic science and engineering research and the second-largest federal source (after HHS) of R&D funds for universities and colleges.

National Aeronautics and Space Administration

NASA obligated an estimated $5.9 billion to R&D in FY 2009, 4% of the federal total. Sixty-seven percent of these obligations were for extramural R&D, given chiefly to industry performers. Agency intramural R&D and that by FFRDCs represented 33% of the NASA obligations total. By character of work, 71% of the NASA R&D obligations funded development activities; 17%, basic research; and 12%, applied research.

Department of Agriculture

USDA obligated an estimated $2.3 billion for R&D in FY 2009, with the main focus on life sciences. The agency is also one of the largest research funders in the social sciences, particularly agricultural economics. Of USDA's total obligations for FY 2009, about 67% ($1.6 billion) funded R&D by agency intramural performers, chiefly the Agricultural Research Service. Basic research accounts for about 41%; applied research, 51%; and development, 8%.

Department of Commerce

DOC obligated an estimated $1.5 billion for R&D in FY 2009, most of which represented the R&D and R&D plant spending of the National Oceanic and Atmospheric Administration (NOAA) and the National Institute of Standards and Technology (NIST). Seventy-seven percent of this total was for agency intramural R&D; 23% went to extramural performers, primarily businesses and universities/colleges. For the R&D component, 12% was basic research; 72%, applied research; and 16%, development.

Department of Homeland Security

DHS obligated an estimated $1.0 billion for R&D and R&D plant in FY 2009, nearly all of which was for activities by the department's Science and Technology Directorate. Sixty-one percent of this obligations total was for agency intramural and FFRDC activities. Just over 39% was conducted by extramural performers—mainly businesses, but also universities/colleges and other nonprofit organizations. Of the obligations for R&D, 15% was basic research; 37%, applied research; and 48%, development.

Other Agencies

The eight other departments/agencies obligating more than $100 million annually for R&D in FY 2009 were the Departments of Education, Interior, Justice, Transportation, and Veterans Affairs; and the Environmental Protection Agency, Agency for International Development, and Smithsonian Institution (tables 4-16 and 4-17). These agencies varied with respect to the character of the research and the roles of intramural, FFRDC, and extramural performers.

Federal Spending on Research by Field

Federal agencies' research covers the whole range of science and engineering fields. These fields vary in their funding levels and have different growth paths (see appendix tables 4-34 and 4-35).

Funding for basic and applied research combined accounted for $63.7 billion (about 48%) of the $133.3 billion total of federal obligations for R&D in FY 2009 (table 4-17). Of this amount, $33.3 billion (52% of $63.7 billion) supported research in the life sciences (figure 4-13; appendix table 4-34). The fields with the next-largest amounts were engineering ($10.3 billion, 16%) and the physical sciences ($5.8 billion, 9%), followed by environmental sciences ($3.8 billion, 6%), and mathematics and computer sciences ($3.6 billion, 6%). The balance of federal obligations for research in FY 2009 supported psychology, the social sciences, and all other sciences ($7.0 billion overall, or 11% of the total for research).

HHS accounted for the largest share (56%) of federal obligations for research in FY 2009 (appendix table 4-34). Most of this amount funded research in medical and related life sciences, primarily through NIH. The five next-largest federal agencies for research funding that year were DOE (11%), DOD (11%), NSF (10%), USDA (3%), and NASA (3%).

DOE's $7.2 billion in research obligations provided funding for research in the physical sciences ($2.6 billion) and engineering ($2.5 billion), along with mathematics and computer sciences ($1.0 billion). DOD's $6.8 billion of research funding emphasized engineering ($3.5 billion), but also included mathematics and computer sciences ($0.9 billion), physical sciences ($0.8 billion) and life sciences ($0.9 billion). NSF—not a mission agency in the traditional sense—is charged with "promoting the health of science." Consequently, it had a relatively diverse $6.1 billion research portfolio that allocated about $1.0 billion to $1.3 billion in each of the following fields: environmental, life, mathematics/computer, and physical sciences; and engineering. Lesser amounts were allocated to psychology and the social and other sciences. USDA's $2.1 billion was directed primarily at the life (agricultural) sciences ($1.7 billion). NASA's $1.7 billion for research emphasized engineering ($0.6 billion), followed by the physical sciences ($0.5 billion) and environmental sciences ($0.4 billion).

Growth in federal research obligations has slowed since 2004. Federal obligations for research in all S&E fields expanded on average at 3.6% annually (in current dollars) over the last 5 years (FY 2004–09), a much higher 6.6% over the last 10 years, and 5.8% over the last 20 years (appendix table 4-35). Adjusted for inflation, the 2004–09 average growth turns into an average annual increase of only 0.9%, which contrasts with a 10-year real growth of 4.1% and 3.3% over the last 20 years.

Since the late 1990s, growth in federal research obligations in the life sciences and psychology has exceeded the S&E average, leading to growing shares for these fields. Growth for the mathematics and computer sciences was just below the S&E average. The shares of research funding going to physical sciences, behavioral and other social sciences, and engineering, declined. Environmental sciences grew slower than both total research and inflation.

Federal R&E Tax Credits

The federal government makes available tax credits for companies that expand their R&D activities, as a way of counteracting potential business underinvestment in R&D. Governments stimulate the conduct of R&D through tax incentives—allowances, exemptions, deductions, or tax credits—each of which can be designed with differing criteria for eligibility, allowable expenses, and baselines (OECD 2003). In the United States, federal tax incentives for qualified business R&D expenditures include a deduction under Internal Revenue Code (IRC) Section 174 (C.F.R. Title 26) and a research and experimentation (R&E) tax credit under Section 41.[22] The latter was established in 1981 by the Economic Recovery Tax Act (Public Law 97-34). It was last renewed by the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, through 31 December 2011.[23] The Obama administration has proposed making this credit permanent (U.S Department of Treasury 2011).

Along with the United States, over 20 OECD countries offer fiscal incentives for business R&D (OECD 2011b). Fiscal incentives for R&D are typically predicated on R&D's role in economic growth along with the recognition that R&D can generate social benefits well beyond those captured by companies investing in such activities (see Hemphill 2009 and references therein).

In the United States there were about $8.3 billion in business R&E tax credit claims both in 2007 and in 2008 (see appendix table 4-36).[24] Five industries accounted for 75% of these claims in 2008: computer and electronic products; chemicals, including pharmaceuticals, and medicines; transportation equipment, including motor vehicles and aerospace; information, including software; and professional, scientific, and technical services, including computer and R&D services.

Since 1998, R&E credit claims have grown at about the same average annual rate as has company-funded domestic R&D, keeping the ratio of R&E credit claims to company-funded domestic R&D in a narrow range (3.3% in 2008).[25] In 2008, more than 12,700 corporate returns claimed at least one component of the R&E tax credit (appendix table 4-37). Corporations with more than $250 million in business receipts accounted for 14% of returns claiming the credit in 2008 and 82% of the dollar value of all claims. In 2001, they had accounted for 9% of returns and 73% of dollar claims.[26]

The federal R&E tax credit encompasses a regular credit and as many as two forms of alternative credit formulas since 1996.[27] Under the regular credit, companies can take a 20% credit for qualified research above a base amount for activities undertaken in the United States (IRC section 41(a)(1)). Thus, the regular credit is characterized as a fixed-base incremental credit. An incremental design is intended to encourage firms to spend more on R&D than they otherwise would by lowering after-tax costs (Guenther forthcoming). Expenses paid or incurred for qualified research include company-funded expenses for wages paid, supplies used in the conduct of qualified research, and certain contract expenses. Further, research "must be undertaken for discovering information that is technological in nature, and its application must be intended for use in developing a new or improved business component."[28] The credit covers U.S.-performed R&D by both domestic and foreign-owned firms and excludes R&D conducted abroad by U.S. companies. Activities generally disallowed for the purposes of the credit include those conducted after the beginning of commercial production and adapting an existing product or process. Research in the social sciences, arts, or humanities and research funded by another entity is also excluded.

Notes

[21] Federal agencies also sponsor FFRDCs; see appendix table 4-33.
[22] For information on R&D credits at the state level, see NSB (2008, chapter 4) and Wilson (2009).
[23] See Section 731 of H. R. 4853, Public Law 111-312. The statute also renewed the credit retroactively for activities after December 31 2009, given that the credit had expired on the latter date according to the Emergency Economic Stabilization Act of 2008 (H.R.1424, Public Law 110-343, Division C, Title III, Section 301). This credit has now been extended 14 times despite its temporary status since its inception.
[24] Based on data from the Internal Revenue Service/Statistics of Income (IRS/SOI). Data are sample-based estimates and are subject to sampling and nonsampling errors. For statistical methodology, see section 3 in IRS (2010).
[25] This percentage is based on company and other nonfederal funds for business R&D.
[26] Based on IRS/SOI figures B and C in http://www.irs.gov/taxstats/article/0,,id=164402,00.html (accessed 25 February 2011). See also IRS (2008).
[27] The alternative incremental tax credit was in place from 1996 to 2008; a simplified alternative credit has been in place since 2006. See IRS (2008) and Guenther (forthcoming).
[28] See IRS tax form 6765 at http://www.irs.gov/pub/irs-pdf/f6765.pdf.
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