Industrial firms receive over 60 percent of federal R&D funds in California, compared with the national average of slightly less than half. In fiscal year 1993, $9.4 billion of a $15.4 billion statewide total flowed to industrial firms.

Eighty percent of these funds, or $7.5 billion, came from DOD, the balance coming primarily from NASA. Industrial firms receive federal R&D funding mostly to conduct contract research for defense or space needs rather than to subsidize commercially-oriented R&D work.

The vast majority of DOD-funded R&D in California is for development work on weapons systems, including an array of evaluation, prototype development, and testing work which carries through until production. Industrial firms, particularly those concentrated in Southern California, conduct about 80 percent of this type of work, with DOD labs performing the remainder.

Industrial firms also play a significant role in the performance of basic and applied research funded by DOD. This is in sharp contrast to research funded by other agencies which is usually conducted by government labs, FFRDCs, or universities.

DOD's development work in California, and thus its funds to California industrial firms, are expected to increase slightly in FY 1996 and in subsequent years despite flat or declining total R&D spending. After many years of decline, DOD's R&D budget increased by 1.5 percent between FY 1995 to 1996, to $35.9 billion. Congress has indicated its intention to hold the line on defense spending even as nondefense spending declines. Also, the current DOD strategy is to expand the share of DOD's R&D budget that goes toward advanced development activities at the expense of basic and applied research, a trend which should favor California defense contractors. In FY 1996, the "Science and Technology" portion of DOD's R&D declined by 2 percent while the budget for the remaining advanced development, testing and evaluation categories in which California firms are dominant increased by nearly 6 percent.