In previous years, efforts to balance the federal budget left the science and technology community with expectations of fewer dollars and leaner years. In 1997, the White House and Congress reached an agreement to balance the budget by 2002. In the aftermath of the agreement, and with the U.S. economy growing at a rapid pace, congressional appropriators found themselves in an entirely different environment than the past two years. Because the budget agreement allowed for increases in discretionary spending, the portion of the budget that funds all federal R&D, in FY 1998, appropriators were in the position of deciding which programs should receive increases. This is a sharp contrast to FY 1996 and FY 1997 when decisions were being made as to which programs should be eliminated or cut. 

Federal R&D, therefore, fared better than anticipated in the FY 1998 appropriations process. R&D funding for NIH, NSF, and the Environmental Protection Agency (EPA) grew significantly even after adjusting for inflation. Other R&D agencies such as NASA, and USDA received small increases, while DOD R&D decreased. While this situation represents a substantial improvement over the sharp reductions that were projected in past budgets, all federal agencies, except for NIH and NSF, still have less to spend on R&D, in constant dollars, in FY 1998 than they did in FY 1994. 

The President’s FY 1999 budget request also shows good prospects for growth in R&D. The Administration singled out NIH and NSF to receive large increases for FY 1999 and in the out-years. Cancer and human genome research received particular emphasis. With the recent international agreement to reduce global greenhouse gas emissions, the Administration has also targeted the Department of Energy (DOE) to receive large increases for R&D. DOE’s R&D budget request focuses on fossil energy, energy conservation, and basic energy science research programs. Finally, the transformation of our society to one dependent on electronic information has reinforced the need for federal investments in information technology R&D within various agencies such as DOD, NSF, and DOE. 

Recent trends in R&D funding and the President’s budget request are generally good news for civilian research institutions across the country. However, the implications of these trends for the future of R&D in Arizona are mixed. Arizona may find some aspects of its share of the federal research enterprise weakened because of the distribution of the state’s federal R&D funding among the federal agencies. 

Arizona derives a larger share of its R&D funding from the federal government than do most states. (Fifty-five percent of Arizona’s R&D is federally-funded, compared to a national average of about 35 percent.) More than two-thirds of these federal funds come from DOD. In view of the recent downward trend in DOD’s R&D budget, it is noteworthy that federal support of R&D in Arizona has generally increased during the past several years. This suggests that the state has been receiving a growing share of a shrinking pie. Since DOD is the main source of federal R&D funding to Arizona’s aerospace and electronics industries as well as to its federal laboratories, the question of how long this growth can continue before it is affected by declines in defense R&D is an important one to the state. 

On the brighter side, though, is the compatibility between DOD’s long-term goals and the types of technological expertise found in Arizona. DOD is increasingly focusing on electronic warfare, using telecommunications and computers to efficiently coordinate and conduct military campaigns with reduced manpower and costs. Arizona has many public and private resources, like those of EPG and Motorola, which could play an integral part in developing the technologies that will be used by the armed forces in the 21^st century. 

NASA is another federal agency whose R&D budget has declined during the past several years and is projected to continue shrinking. While money from the International Space Station project will continue to flow to Arizona’s space businesses for the next few years, the universities and colleges that receive over $39 million from NASA for other activities may have to fight harder for research funding. 

HHS is the exception among the federal R&D funding agencies in that it has consistently received large increases in recent years. This is good news for the University of Arizona, the state’s number-one recipient of HHS R&D funds. UA and its Health Sciences Center lead the state in biomedical research. The research programs of the Phoenix-based Epidemiology and Clinical Research branch of the National Institute of Diabetes and Digestive and Kidney Diseases and the state’s nonprofit health institutions are also likely to benefit. 

In general, though, the growth and standard of living Arizona residents enjoy are pinned to high technology innovation and product development. Manufacturers of semiconductors, electronics, and aerospace technologies perform most of the state’s R&D. Federal R&D funding, in the form of defense and space contracts, often facilitates innovation, leading to new technologies. Given the right interplay of timing, market forces, and opportunity, new technologies can lead to new products, keeping manufacturers competitive. 

Many of Arizona’s high technology businesses are in extremely competitive industries, such as computers and electronics, where product cycles are very short and continued innovation is necessary. Now, with the development of the Asian economic crisis, many Arizona businesses may see markets flooded with low cost goods. Manufacturers across the United States and Arizona could face increased pressure to lower costs while maintaining their competitive advantages. 

In the face of these increased pressures on Arizona’s aerospace and electronics businesses, it makes sense for the state to think about ways to diversify its research enterprise. While Arizona is likely to remain strong in astronomy, aerospace, and advanced electronics research funding, this might be a good time to explore opportunities for expanding research and technology-based industry in the biomedical and environmental sciences, and in software and information technology, as well as in energy development and conservation.