| Highlights
- Although R&D investment by
U.S. industry surpassed inflation in 2004, 2005 will
most likely mirror the preceding two years, with a small but less-than-inflationary
increase. There will again be wide variation depending on industry. Pharmaceuticals,
software, computer and component makers, and a few profitable biotechnology
companies are increasing their R&D. Auto, aerospace, networking equipment
manufacturers, chemical and process-related industries will be mixed but
with small total sector increases likely. Telecommunications companies
are still closely controlling spending. With sales performance generally
improving, R&D intensity—R&D as percent of sales—will decrease.
- Internally generated business growth opportunities, either within existing
product lines or based upon newly employed platforms, will command the
largest proportion of the budget. R&D spending for new business opportunities,
mergers, and acquisitions will increase, as will capital spending to support
R&D. In contrast to the recent past, there will be some increases
in technical work force.
- Other countries and regional governments continue to plan for, invest in,
and build innovation capacity as a driver for economic growth and competitiveness.
The United States government, with its high military
and homeland security spending and other priorities, is finding it difficult
to continue its support of technology growth at historical levels.
- Industrial R&D, while still dominated by in-house
development work, is increasingly turning to collaborative programs around
the world with supply chain partners, universities, federal laboratories,
and even competitors. Contract research is also increasing. Such joint
efforts are now viewed as necessary to gain more rapid access to desired
technologies and the diverse talent to produce them, particularly in directed
basic research programs.
R&D Investment
R&D funding by industry grew at a rate slightly above
inflation for the first time in three years. The Battelle R&D Magazine
study has estimated that the increase for 2004 was 4.3 percent over 2003,
taking industry’s R&D investment to $187.4 billion last year. Battelle
projects an increase in industry R&D funding of 1.9 percent for 2005,
to $190.9 billion. For comparison, between 1992-2001 industrial R&D
spending grew steadily, with half of those years recording near or above
double-digit percentage increases. IRI’s Trends Forecast for 2005
shows 80 percent of companies will increase spending year-to-year. Comparing
previous forecasts to actual, this information supports a slight increase
in spending to $191.2 billion. The estimate is supported by anecdotal
evidence gathered more recently in meetings with industrial research leaders
and the advantage of seeing actual business performance and employment
trends for a number of months. The economy shows signs of modest growth,
but a large predicted federal budget deficit, a growing trade imbalance,
record high energy costs, and inevitable reduction in government support
for non-defense/security basic research moderates any optimism by industrial
management. These estimates are reflected in Figure 1, which tracks R&D
investment by industry over 10 years through 2005. Year-to-year change
percentages are shown in Figure 2.
Industry’s performance of R&D in 2004 was $205.0
billion, up 4.5 percent from $196.1 billion in 2003. Battelle projects that
this figure will increase 2.0 percent during 2005, bringing industry’s total
R&D effort to $209.1 billion this year. Using the revised estimates for the
proportion funded by industry, and recognizing that government funding for
industrial research is not as volatile, we estimate that this value of R&D
performed by industry will be closer to $209.4 billion or up 2.2 percent. Thus,
industry will fund more
than 61 percent and will again perform
some 67 percent of the total of $311.9 billion we estimate will be invested in
R&D in the U.S. during 2005. This decrease of
one percent from last year for both indicators continues the downward drift
seen each of the last several years.
R&D Trends
For 2005
The Industrial Research Institute (IRI) R&D Trends Forecast, based on replies from 99 IRI member
companies during the third quarter of 2004, continues to forecast a minor
retreat from the historical pattern of continued growth, above inflation,
in R&D of the late 1990’s. However, results suggest a modest
increase of support of both new and existing businesses and an arrest
of the previous decline for directed basic research, all in current dollars.
There will be hiring growth, more contracts with federal laboratories
and universities, continued mergers and acquisitions as a route to quickly
access desired technologies, and increasing capital spending in support
of R&D.
As implied also with the 2004 survey, businesses continue
to recognize that initiating totally new businesses within an existing
corporate structure (crossing the “valley of death”) is extremely difficult.
More companies will spin out new business ventures spawned by their technology
platform development successes.
U.S.-based and foreign-headquartered companies
recognize that the pool of talented scientists and engineers is now global
and accessible by outsourcing work, by setting up remote wholly-owned
laboratories, or by offering bounties over the internet for solutions
to well-defined technical challenges. The need for U.S. companies to look
beyond home borders is heightened by declining production of its own graduate
scientists and engineers and by stricter limits on immigration. In addition
to U.S. and European companies
siting labs in each others’ territory, both are looking toward India, China, and former Soviet
states. India has particular strengths
in chemical synthesis, software development, and clinical testing of drug
candidates. The People’s Republic of China is strong in software,
computational analysis, value engineering of products, and product development.
Eastern Europe is particularly strong
in directed basic research. However, these locations and others carry
a real potential to lose intellectual property.
Global Innovation Strategies
Countries all over the world are taking a close
look at their innovation systems in order to insure economic security.
Those that recognize and plan for a global economy are most likely to
thrive.
United States: Over the past ten years, a new informal innovation system evolved in the
U.S., with support from
government and industry for basic research in universities, nurtured by
rapid growth in venture capital, and implemented by industrial firms through
strong investments in R&D, capital equipment, and information technology.
This highly complex system of innovation is also based on close collaborations
and increasing alliances among industry players, universities, and government
labs. There are now stresses in this proven formula that must be addressed.
The major discontinuity in venture capital
funding following the collapse of the Internet bubble is slowly being
mended. But this method of support focuses on technologies for which proof
of concept and a clear sense of market are at hand. High-risk projects
and those with long incubation periods, like those that might transform
an industry, are not usually attractive to venture firms. However, by
comparison the U.S. still has a more robust
system of early stage capital sourcing than many economies.
Unfortunately, defense and homeland security
needs will put great pressure on government spending that could otherwise
lead to new commercially important technologies, products, and services.
Appropriate support is in doubt for the critical
measurement and standards work of the National Institute of Standards
and Technology (NIST), its world-class and widely-emulated Advanced Technology
Program, and its very effective Manufacturing Extension Partnership. Funds
for partnership programs between national laboratories and industry, and
the offices to foster and manage such collaborations, have disappeared.
The promised doubling of the National Science Foundation budget to support
physical sciences and engineering programs in universities has been abandoned.
Partnerships in math and science that could begin to rebuild a technically
capable workforce have been reduced and redirected. The Technology Administration
in the Department of Commerce is vulnerable. Continuing along this path
threatens to undermine U.S. industrial competitiveness.
In response, an industry-led National Innovation
Initiative sponsored by the Council on Competitiveness has engaged a broad
coalition of industry and academe to address the whole system of
innovation in the U.S. and its competitiveness
opposite increasingly popular global venues for research. An implementation
plan is being prepared and will be launched shortly. This approach, to
increase the attractiveness of the U.S. to both foreign direct
investment and our own global companies, is far more likely to succeed
than a retreat to protectionism.
Europe:
The
enlargement of the European Union, formation of a new Commission in Brussels,
and serious examination by nations of (slow) progress towards the Lisbon
objectives of greater competitiveness in the knowledge economy have led
to examination of the role played by industrial R&D. The 2004 EU Industrial
R&D Investment Scoreboard demonstrates that European companies remain
strong in key sectors, notably automotives, and that there is a group
of large companies that are very successful through their R&D, but
the overall trend is still down.
There are plans to establish an independent
European Research Council, with substantial budget devoted to funding
frontier research according to competitive, international submissions.
The Technology Platform initiative is advancing quickly, bringing together
stakeholders from the public and private sectors under industry leadership
to establish realistic medium term and longer term research agendas. At
national level, there is lively debate concerning the relative merits
of free markets and national champions in establishing competitive advantages
in key areas dependent on R&D.
Latin
America: Industry will increase
its budgets for R&D in 2005, especially in the pharmaceutical and
chemical sectors. Governments continue steady support to their national
research laboratories but at a level below the demand to support many
sound projects. Interaction between the research laboratories and industry
is increasing. There is no movement in government circles to establish
research toward advanced technologies. Some regional innovation strategies
have encouraged formation of technology clusters. Private industry is
greatly interested in building an international cooperation program for
research, technology and innovation, such as the “Framework Program for
the Americas” but investment support
has not been identified. Joint programs with the United States and Canada are being sought.
The few current examples of international cooperative projects, particularly
in biotechnology, are still primarily academic.
Asia: The Chinese
government views 2005 as a vital year to build its country’s innovation
capacity to support a harmonious, well-rounded, and prosperous society.
A National Science and Technology Plan for 2006-2020 will be promulgated
to: produce proprietary intellectual property by scanning the leading
science and technology developments; strengthen national competitiveness
by developing key technologies; focus on strategic high-tech products
and projects; and build sustainable innovation capacity.
To support the Plan’s goals, the government
will play an active policy role, drastically increasing public expenditure
on R&D. It will improve infrastructure and streamline the innovation
system. A comprehensive set of national programs has been developed to
manage various aspects of the Plan. Implementation of the Plan and supporting
programs will be led by the Ministry of Science and Technology.
The economy of Japan is holding steady,
supported by satisfactory exports and increasing domestic consumption.
Deflation is a continuing concern. Recovery is being led by digital consumer
products and the materials industries, especially steel. Although the
National Budget of 2005 fiscal year will show decreased expenditures,
the allocation for promoting science and technology will by increased
by 2.6 percent to 1.3 trillion yen. This is aligned with the Japanese
Government strategy to realize “an advanced science- and technology-oriented
nation”.
In spite of a blurry economic picture, Korean R&D expenditure will increase
22.2 percent in 2005, focusing on telecommunications, electronics, computers,
machinery, chemicals, metals, and food & medicines. Over 80 percent
of the companies surveyed will increase R&D expenditures in 2005.
Although some manufacturing facilities are
moving overseas, mainly to China, few companies set
up R&D centers there. At the same time, with governmental endeavors
to make Korea a “R&D Hub of
Northeast Asia”, the number of foreign
R&D centers established in Korea has increased.
The Korean Government has taken additional
bold actions to strengthen the nation’s S&T capabilities. It plans
to build an “S&T-oriented Society.” As a start, the S&T Minister
is now a Vice Prime Minister position. The National Innovation System
will be reworked to improve university research, seek globalization and
to concentrate national S&T resources on the development of 10 new
growth industries. To facilitate commercialization of public R&D results,
the technology transfer budget was more than tripled.
Australia: Industrial R&D
(IR&D) in 2005 appears to enjoy a more favourable climate than at
any time since 1996. A recent survey suggested that the major issues are
staff recruiting and development; team development; outsourcing and portfolio
management, with an emphasis on emerging technologies. This is a marked
turnaround from the days of downsizing, restructuring, globalisation and
knowledge management. Business expenditure has doubled in constant dollars
over thirteen years to $A5.9 billion (2002/03). The largest industry sectors
are manufacturing at 46 percent and mining at 10 percent.
While the general innovation climate has improved since 2000 with the “Backing
Australia’s Ability Program,” substantial increases in financial support
for industrial research have not been forthcoming. This $A5 billion/five
year program focuses on enhancing innovation across universities, public
research agencies and business. The biggest winners have been universities
and public sector research, with the support for business R&D reducing
steadily and an increasing proportion of support going to the SME’s. The
major industry support program is a 125 percent tax concession for IR&D
(increasing to 175 percent for IR&D increases that satisfy certain
conditions). This support program has been often described by industry
as “sustaining but not stimulating”. Therefore the more positive climate
for IR&D in 2005 must be viewed as largely self-funded by industry.
Conclusions
The year 2005 is a welcome minor improvement
for the U.S. industrial research
establishment. In spite of economic malaise, international threats, and
the growing deficit, industry will initiate bold steps to prepare to thrive
and to structure the nation to again be the premier R&D site for global
technology-based companies.
Acknowledgements: The section on Europe was provided by Dr. Andrew Dearing
of the European Industrial Research Management Association, on Latin America
by Dr. Horacio
Bosch of the
Council of Industrial Research Associations of the Americas, on China
by Dr. Zhao Xiangdong of the Chinese Embassy in Washington DC, on Japan
by Dr. Hiroei Fujioka, Japan Techno-Economics Society, on Korea
by Mr. Son Seung-hyun of the Korea Industrial Technology Association,
and on Australia by Dr. Allan Clark of the Australian Industrial Research
Group.
Studt,
Tim and Duga, Jules, Continued Defense
Spending Offsets Flat Industrial R&D, R&D Magazine—January 2005, pp. F1-F15.
Industrial Research Institute’s R&D
Trends Forecast for 2005, RESEARCH- TECHNOLOGY MANAGEMENT, January-February
2005, pp. 18-22.
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