From a conceptual perspective, the economics of research and development are the opposite of pollution. When private parties carry out economic activities that result in pollution, they receive economic benefits, but wider society bears the costs (a technical term for “negative externalities”). However, when private parties carry out research and development, the private sector benefits to some extent, but the additional benefits of new knowledge spread to the rest of the economy (“positive externalities”). Therefore, it makes sense to have public policies that encourage research and development while curbing pollution.
I have long and often argued for a significant increase in U.S. R&D spending (e.g., here , here , here , and here ). Corporate spending on R&D. Below are several graphs showing the overall pattern of U.S. R&D spending from “Trends in U.S. R&D Performance” (National Science Foundation, May 2024).
For a long time I’ve said this about U.S. R&D funding: There was a significant increase in U.S. R&D spending during the 1950s and 1960s, driven primarily by U.S. government R&D spending aimed at military and space programs. . However, while federal R&D spending as a percent of GDP began to decline after the 1960s, corporate R&D spending as a percent of GDP increased.
These two forces have balanced each other out for decades, with total R&D spending as a percentage of GDP (blue line) hovering between about 2.3% and 2.7% of GDP from the early 1980s until about 2013. A significant change is seen. Although federal support for R&D continues to lag as a percentage of GDP, corporate R&D spending is surging, pushing U.S. R&D spending to about 3.5% of GDP. With U.S. GDP in 2024 at about $29 trillion, a 1% increase in GDP would mean about $290 billion more was spent on R&D this year than would have been spent if R&D had stayed in this lower range.
The same pattern emerges when we look at R&D spending. The lines here are not adjusted for inflation or economic growth, so the picture can be a bit misleading in some ways. However, we can see that the scale of government and industry R&D spending was similar until the late 1980s. Since then, growth in U.S. R&D spending has been driven by corporate R&D spending, particularly over the past decade.
This figure shows the proportion of R&D funding coming from different sources. As you can see, the share of R&D in corporate spending has increased dramatically and is now close to 80%.
These figures provide international comparisons. The blue bar shows national R&D spending in absolute levels (measured on the left axis). So big economies like the United States, the entire EU-27, and China have the largest bars. The red diamond represents national R&D spending as a percentage of GDP (measured on the right axis). As you can see, several small economies, such as South Korea and Taiwan, spend more as a percentage of their GDP than the United States. However, in general, the United States has the highest level of absolute R&D spending, and due to recent increases in R&D spending by companies, it is also one of the countries with the highest ratio of R&D spending to GDP. To me, the gap between the US and the EU-27 in R&D spending is particularly striking.
Finally, one concern that is sometimes expressed is that corporate capital expenditures with respect to R&D may be focused more on the “D” of developing products for short-term sales in the market and less on “basic” research. It is very important for long-term development. Please refer to the following picture regarding this point. “Analysis of Federal Funding for Research and Development in 2022: Basic Research.” (National Science Foundation, August 15, 2024).
As can be seen in the figure, the government accounted for 70% of funds for basic research in the 1960s and 1970s, and more recently, until the early 2000s, the government monopolized 60% of the total. However, the increase in R&D spending by all U.S. companies also includes corporate “basic” research spending. It appears that primary corporate R&D spending will now exceed federal government spending.
One of the conundrums of the global economy these days is that the U.S. economy appears to be continuing to grow, albeit at a moderate pace, while other high-income countries such as Europe, Japan, and Canada appear to be stuck in slower growth. pattern. My guess is that the surge in U.S. R&D spending is part of the explanation for that pattern. Moreover, high levels of corporate R&D spending indicate that while U.S. companies see opportunities to leverage their R&D efforts in an ever-changing and evolving U.S. economy, many European companies do not see the same willingness and opportunity for change within their companies. suggests. domestic market.
