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Why U.S. Business R&D Is Not as Strong as It Appears

June 4, 2018

Business R&D growth over the past three decades has been anemic, and companies are focusing more on near-term product development, less on basic and applied research. Meanwhile, the U.S. government is cutting support for research while many other countries are expanding support.

Investment in research and development (R&D) lays the foundation for the successful evolution of the innovation economy. By investing in R&D, science is advanced, fresh ideas are generated, technologies are developed, and new products, services, and processes emerge. But while business R&D investment in the United States jumped by two-thirds on an inflation-adjusted basis from $328 billion in 2000 to $458 billion in 2016, the rate of R&D growth as a share of GDP over the same period has been anemic—inching up from 2.61 percent to 2.74 percent. Moreover, businesses are investing a much smaller share of their revenues in riskier early stage basic and applied research than in later-stage development, and the global share of business R&D performed in the United States has fallen significantly in the last decade. In order for the United States to continue expanding its innovation economy, it must enact stronger policies that support both business R&D—such as more-generous R&D-specific tax incentives and expansion of the STEM workforce—and federal R&D, as every dollar of federal R&D spurs an additional 30 cents in business R&D.

This report briefly describes how business R&D leads to greater productivity, more employment, and increased competitiveness. It also explores the R&D landscape in the United States—both across the economy and by industry—and how U.S. businesses’ R&D investments compare with those of their counterparts in other countries. The report concludes by offering a number of policy recommendations:

Provide Stronger Tax Incentives for Business R&D

  • Expand the rate of the Alternative Simplified Credit from 14 percent to at least 25 percent.
  • Institute an “innovation box” that provides favorable tax treatment for revenues generated from newly developed intellectual property.

Expand STEM Skills

  • Enact more generous immigration rules regarding STEM workers intending to move to the United States, such as by shifting more permanent-resident slots away from family-based and other related programs to workers with advanced STEM skills.
  • Expand National Science Foundation (NSF) funding for Ph.D. STEM fellowships each year, as they are key factors in producing more Ph.D. degrees in STEM fields.
  • Establish cash prizes for colleges and universities that succeed in graduating more STEM students.
  • Appropriate funding for the NSF to award prizes to colleges and universities that dramatically increase—and then sustain—the rate at which freshman STEM students graduate with STEM degrees.

Increase Federal R&D Spending

  • Commit to restoring federal R&D to 1980s levels as a share of GDP.
  • Increase funding for industry-university partnerships from $8 million to at least $50 million.
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