R&D: The current state of affairs

I am not a big fan of share buybacks. I have said in the past that my first priority would much rather be R&D versus a buyback; A special or regular dividend is also preferable. 

When the company I sit on the BoD on had a windfall from a patent matter last year, we authorized a 90 cent special one time dividend — and this from a small tech company, no less.   

Today’s NYT has an article on the state of R&D at the moment. It is a mixed picture, but with some negative trends developing:  "While the United States remains the world’s biggest investor in research and development, there are troubling signs. At a time when some of the nation’s most formidable competitors are investing heavily in research, the United States is treading water."


US R&D versus Other Nations
click for larger chart
Courtesy of the NYT


The prime issue in my book is the threat from China, and to a lesser degree Korea and Japan. During the 90s, the U.S. regained much of its luster thanks to our enormous technology growth; Think of how much the U.S. dominates the entire PC, Networking, Storage and Internet sectors  — that’s the result of R&D from the late 80s.

However, we are starting to slip in biotech — think stem cell research. I’m not sure who else might be contesting with us for Nano-technology; And I do think that — unless Oil drops below $50 — the field of alternative energy is now wide open. I’d love to see a special Capital Gains tax exemption for long term investing in that field  (i.e., 5-10 years).

Here’s an excerpt from the NYT piece:

"Total R.& D. spending in the United States grew for decades until 2002, when it dropped for the first time in 50 years after the crash of technology stocks. According to the latest figures from the National Science Foundation, such spending climbed slightly in 2003, to $291.9 billion, after adjusting for inflation, and is estimated to have increased to $312.1 billion in 2004.

Because the official numbers stop there, industry groups try to make more up-to-date estimates. Battelle, the science and technology company based in Columbus, Ohio, working with R&D magazine, expects research and development spending to grow 2.9 percent this year, to $328.9 billion. That growth rate is around the historical average, and about half the average growth of the late 1990’s.

The underlying picture, however, is less comforting than these numbers suggest.

After several years of spending a bit more on research and development, the federal government is cutting back in some areas, after adjusting for inflation. While the government will continue to spend more on developing weapons systems and spacecraft, overall government investment in basic and applied research — the foundation of the nation’s innovative capacity — is in some ways shrinking.

Kei Koizumi, director of the research and development budget and policy program at the American Association for the Advancement of Science, says federal investment in research as a share of the nation’s total economic output is projected to drop to 0.4 percent in 2007 from 0.5 percent this year. (While 0.4 percent has been the average since the 1970’s, Mr. Koizumi said it was widely recognized that as technology drives more of the economy, research to replenish the knowledge base for future innovations becomes more important.)

It wouldn’t be so bad if this were just a blip. But R.& D. investment has been a declining priority for the government — once the dominant source — for several decades. Forty years ago, the government accounted for 67 percent of total R.& D. spending; today, its share is roughly 30 percent. Corporate America makes up most of the rest."

Worth thinking about: What is the next major catalyst for economic growth over the upcoming 2 decades?


The State of Research Isn’t All That Grand
Economic View
NYT, September 3, 2006

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What's been said:

Discussions found on the web:
  1. James Mitchell commented on Sep 3

    I would be alarmed, if I thought GOVERNMENT was the only conduit for the planning and funding of research and development. (As if government had a monopoly on competency.) In the past government certainly tried to be the exclusive source for supervision and money.

    I would argue MARKETS are more efficient, especially when the objectives are obviously lucrative. Thus government R&D would be more appropriate for “research for the sake of research”. If government spends more money on research, for the sake of spending more money, inefficiency will result.

    In the case of stem cell research, there is no shortage of private investment money. A government running a deficit should avoid frivolous spending. Some businessmen are looking for a handout and have duped bleeding heart liberals.

    What will be the catalysts of the next big thing? Probably all great developments can be connected to some government research, but this demonstrates the pervasiveness of government research, not its necessity. Looking backwards, some of the greatest changes in the last five decades can be linked to the government, such as the Internet. However, most of the development of the technology and infrastructure of the Internet occurred in the private sector.

    Finally, I wonder about the ownership of discoveries. If the government (or Al Gore) built the Internet, how much investment was recouped? Same goes for stem cell research. Are we redistributing income from tax payers to share holders?

  2. Big Al commented on Sep 3

    Guttenburg Faraday Tesla Watt Diesel Newton, there must be more.

  3. Robert Coté commented on Sep 3

    Why “invest” in R&D only to have the results predated by near everyone? Our IP laws are broken. The US lost the VCR industry because of boxing/cross patent strategies. Copyright are clearly meaningless when first run movies are on DVD in asia the week of release. Even much of Walmart’s “success” depends upon their preying on their suppliers, stealing process, procedure, supplier contacts, customer contacts and product designs as the price of shelf space.

  4. DBLWYO commented on Sep 3

    Barry, you might be interested in Sharon Begeley’s column in Fri’s WSJ: http://online.wsj.com/article/science_journal.html which discusses the decline of NIH funding which lies behind our last 2-3 decades in bio-technical and healthcare advancement. BtW Singapore committed several years ago to evolving from an electronics based tech emporium to a biological one and is now one of the leading exporters of pharmaceuticals. This is the Age of Created Comparative Advantage and gov’t sponsored basic research has underpinned that for decades.

    Let me ask two sets of questions: where did the R&D funding and early capital investment come from for the biggest post-war growth industries of Pharmaceuticals, Plastics and Computers/Electronoics as well as the funding for the Interstate System which changed the behavior of the economy ?

    What were the results of the Space Program for electronics and related efforts ?

  5. Emmanuel commented on Sep 3

    “Stem-cell research”

  6. cb commented on Sep 3


    The corporate market is much less efficient at research than government and nonprofit labs. In hot research areas, you can end up with staggering inefficencies. Dozens of companies doing identical research much of which will never be published and can end up being tossed during a corporate reorganization.

    There are examples where companies have deliberately or inadvertantly destroyed billions of dollars of research results, since the research results had no monitary value and were unprofitable to maintain. From a corporate perspective this makes sense. Companies must focus on profits to survive. Publishing research could give the competition an edge and has little payoff for the company. However from a scientific perspective this is a tremendous loss of information and a collosal waste of years of research-efforts.

    Secondly, corporations generally have a very short time line for acheiving results. Since basic research generates no revenue and few patents most companies wisely stay away. However it is absolutely critical for innovation.

    The research that built the pharmaceutical and biotech industry was generated by academic research labs. Most of the funding for US biological research after the post WWII period was from the NIH.

  7. cm commented on Sep 3

    James: Government is always a cost center. Its job as it comes to financing activities is to finance things of “public interest” which private industry won’t finance because of positive externalities. So that the government doesn’t “recoup” taxpayer money should not come at surprise.

    And then the government also pays major amounts FOR “R&D” of weapons and other military technology, and other special interests.

  8. kevin_r commented on Sep 3

    Over the last generation or so, during the time of Republican/conservative ascendancy, we have shifted power from government to corporations. We have unleashed the power of corporate productivity. More than any other nation, we are able to do whatever can be done with the corporate model. However, I believe we have lost some of our ability to take on projects that work better with a government rather than corporate model. This means projects that are simply too huge, too long over time, or where profit capture is too great a problem. For example, I doubt we are capable of either the Apollo Project or building the interstate highway system anymore.
    I propose the Lighthouse theory of international economic competitiveness. The global economy is like a lighthouse turning, shining the light of maximum opportunity. Whoever happens to be standing where the light is shining, whoever happens to have the type of characteristics that the global economy most needs at that moment, is lit up and looks to themselves and others like the best model. Japan in the 1980s and the United States since. The danger is the tendency to take the moment of glory too seriously, to mistake “this is the best way to do things right now” for “this is the best way”. The concerns raised by Barry and others about our R&D spending and about our competitiveness, especially our competitiveness at the cutting edge, suggest that it is worth looking at the possibility that the model we have been using is reaching the end of its service life.

  9. Bluzer commented on Sep 3

    State of R&D in the US? I’ll give you two words – Bell Labs. This almost unparalled instutuition is, at best, a shadow of its former self. And the same can be said, to a greater or lesset extent, of IBM’s TJ Watson center, Xerox’s PARC and RCA’s David Sarnoff research institute (now part of SRI). We have sacrificed research, particularly fundamental reserch, to the enticing pleasures of quarterly earnings.

    On the cultural side the science-knocking, anti-intellectual, creation-obsessed, rapture-seeking and faith-based dogma propagating thru the land like a pre-ordained wildfire does not help matters.

    Its hard to do research when
    ‘My head’s a box filled with nothing
    And that’s the way I like it’

    Lest you think I’m all doom and gloom – I was very pleasantly surprised by the announcement of the funding of the Orion program. Now if we could only earn that money – instead of merely printing it…

  10. wunsacon commented on Sep 3

    Bluzer, I share your assessment. But, add “political correctness” to your list of cultural issues, which applies to more than just the usual topics. For instance, after your negative assessment, you felt it appropriate to distance yourself from the “doom & gloom club” (disliked by the Koolaid club) by pointing out something positive (Orion).


  11. donna commented on Sep 3

    Government doesn’t DO the research, it FUNDS it. NSF grants are way, way down during the Bush administration. And the way grants are given now is stupid, too. My husband did computer security research and eventually left the field and moved to corporate IT because he couldn’t get grants anymore since he didn’t have a PhD.

    Yes, markets can be efficient if the field is lucrative. But, when basic research is needed, it isn’t always lucrative. It takes many, many years before drugs are profitable, for instance, and because of our for-profit system, when they are released they are overly expensive to make up for the years of research and other failed research. The Internet would never have been developed without government research. Much of the design of comupters and chip technology was initially funded through government research.

    It’s very, very shortsighted to say markets can do everything. Very shortsighted, indeed.

  12. BDG123 commented on Sep 3

    The facts: 40% of all R&D dollars and 35% of all basic research is performed in the US. Add up the R&D done by American companies, and thus owned by American companies, done by their research facilities outside of the US. How does that translate into a loss of science or leadership?

    That said, I’d very much embrace that number dropping to something much less through expanded research done outside of the US. You should too. It will increase our standard of living just as research done in the US today increases the standard of living of those outside of the US.

    An argument without merit. Chicken Little strikes again.

  13. teddy commented on Sep 3

    BDG123, shouldn’t you substitute global or international companies where you indicate “American companies”. They owe nothing to me, to you, to the citizens of the US, and everything to their shareholders and themselves.

  14. Tom in Indy commented on Sep 3

    Re; R & D in relevant areas that effect all of us.
    Go to Sen Lugar’s newsletter http://lugar.senate.gov/newsletter/2006/summer.html to see the next explosion of research in an industry that will help clean up the air and lessen the US dependence on foreign oil. Lugar is a man who quietly does where other talk(Nunn/Lugar deactivating soviet nuclear warheads). Read about the future of our country and the directions we need to head to stay away from danger. Lugar started alternate energy legislation in 1998!

  15. kevin_r commented on Sep 3

    I offer the following to anyone interested in a longer-term perspective on this issue.

    The Headless Economy

    The true cutting edge of the global economy is dulled and fragmented, like an overused razor, due to the lack of the necessary social arrangements. What we have the technical ability to tackle is blocked because we do not know how to handle it socially. A good example would be putting every book ever printed in any language online. A huge project that would have incalculable benefit for productivity and for human culture. (And also spur education world-wide and create a massive new translation industry combining crude but easy machine translation with higher-quality human translation where needed.) Technically, this would now be a laughably easy task. With computer storage costs plummeting, it would not even be particularly expensive. But socially, it is out of the question. The obstacle shows up as a copyright issue, but it actually runs much deeper than that. Another area where the obstacles are clearly social, not technical is online distribution of music, video, and books.
    The economy has shifted from being labor-driven (the more labor one could mobilize, the more powerful the economy), to capital driven, and now to knowledge driven. The problem is that knowledge is fundamentally different from both labor and capital. Knowledge, once created, is wildly easy to reproduce. By comparison, labor and capital are about as difficult to reproduce as to create (although the initial phase of the reproduction of labor is notoriously fun and does play a major role in human culture).
    Trying to organize knowledge-driven production with the rules of a capital-driven economy (i.e. our economy up to the 50s or 60s or so), is like trying to organize a capital-driven 1950s economy by the rules of medieval feudalism. Put it this way. The difference between what the cutting edge of our economy actually is and what it could be is at least as large as the difference between the former East Germany and West Germany. Possibly more like North Korea and South Korea.
    The rules we play by for organizing labor and capital for production can not organize knowledge-centered production. To get around this contradiction, we cripple the reproducibility of knowledge by using copyrights and patents to convert knowledge into a product that is either difficult-to-reproduce or an outright monopoly. The alternative is that we give it away or take it for free as though it has no value at all. (When the taking is against the will of a copyright/patent holder, this is called piracy.) The third alternative is that we give the knowledge away for free but with counter-knowledge (advertising) attached. This more or less works as long as knowledge is peripheral to economic production. But when knowledge becomes the core of the economy, then these approaches cut the heart out of economic development.
    For a knowledge-driven economy to move forward, two aspects of knowledge must be supported: its creation and its dissemination. Copyrights and patents reward knowledge creation but at the cost of crippling knowledge dissemination. This also indirectly undermines the next cycle of knowledge creation. (Company X is rewarded for the profitable knowledge it creates (a new drug, a new song, a new technique for producing electronic circuits) but is held back by its lack of access to knowledge held by Company Y.) Giving it away/taking it for free maximizes dissemination but discourages knowledge creation. The advertising model does reward knowledge creation and supports some dissemination, but warps both processes by rewarding only that information that fits with advertisers’ agendas. To see what I mean, just watch CNBC. In addition, it is hard to see how advertising could be applied to books or pharmaceutical research, for example.
    We take it for granted that developing, catching-up economies like Japan in past decades, then the Asian Tigers, and China now can grow at much higher rates than the most advanced economies. This is only the result of the loss of the cutting edge. Advanced economies mobilizing knowledge should be able to grow much faster than catching-up economies, which normally are first mobilizing labor, then capital. What we think of as high growth in an advanced economy (4-5%) is catatonia compared to what we will accomplish when we find ways to organize knowledge-centered production. However, the transition involved will be at least as large as the transition from the Medieval Age to the Modern Age.
    If any society is going to lead us into this transition, it will need to be one already at the very cutting edge of current production and with sophisticated, flexible social organization. My attention was drawn on Barry’s chart to the high level of R&D in Scandinavia. East Asia might catch up with us, but if someone is going to start pulling away, I would lay my bet on the Scandinavians.

  16. BDG123 commented on Sep 3

    “The problem is that knowledge is fundamentally different from both labor and capital. Knowledge, once created, is wildly easy to reproduce. By comparison, labor and capital are about as difficult to reproduce as to create”

    You must live in China. Do you live in a lawless society? That statement has no merit in a society of protections for intellectual capital. To the contrary, it is labor that is easy to reproduce. So, if someone comes up with the cure for cancer tomorrow or has a breakthrough in quantum well research which would radically alter everything we know about computing, it is easily reproducable? Then why would the world spend hundreds of billions on R&D if their work was not defendable? For grins and giggles?

  17. Brian commented on Sep 3

    Stem cells – oops can’t do that.

    Cloning – oops can’t do that.

    Don’t tell them about Nano or Alt Energy or they’ll figure out some reason why it offends Jesus.

    Some nano/biotech hybrid is the way of the future. But this is probably like guys in 1920 thinking in the future of 1960 everyone would have their own personal helicopter. Who knows.

  18. Brian commented on Sep 3

    kevin-r – that reminds me. You mention Scandanvia. There was a story a while back about how the Pentagon was funding stem cell R&D projects in Sweden because it couldn’t be done here. Just interesting.

  19. kevin_r commented on Sep 3

    Kevin: “The problem is that knowledge is fundamentally different from both labor and capital. Knowledge, once created, is wildly easy to reproduce. By comparison, labor and capital are about as difficult to reproduce as to create”

    BDG123: You must live in China. Do you live in a lawless society? That statement has no merit in a society of protections for intellectual capital. To the contrary, it is labor that is easy to reproduce. So, if someone comes up with the cure for cancer tomorrow or has a breakthrough in quantum well research which would radically alter everything we know about computing, it is easily reproducable? Then why would the world spend hundreds of billions on R&D if their work was not defendable? For grins and giggles?

    Kevin: Exactly. We have copyright/patent laws precisely because without them freeloaders would just copy knowledge. We don’t need laws to defend against duplication of labor and capital because they are inherently difficult to duplicate.
    My point is that using copyright/patent laws has a large cost: they protect creation of knowledge by limiting its dissemination and utilization. The important knowledge is to the economy, the more crucial this cost.
    I am NOT saying that giving away knowledge for free is the answer. I am saying we have to find a way to do what copyright/patents do (reward and motivate knowledge creators) without crippling utilization. And that this will be very difficult to do, but unimaginably worthwhile.

  20. wunsacon commented on Sep 4

    Please do not create a special tax preference for alternative energy investments, because then:
    – Lots of companies will suddenly declare how their work is related to the field of alternative energy.
    – Special committees will be formed to craft special rules.
    – Accounting and tax software will have to be adjusted.
    – Many people will have to be trained on new rules and new software.
    – 10 years from now, the IRS will have to follow up on and prosecute a bunch of idiots who intentionally misread the rules.

    Isn’t the *relative* advantage or disadvantage of alternative energy what’s important? If so, then let’s:
    – raise gax taxes further,
    – increase the standard deduction to adjust for the regressive nature of the increase in gas tax, and
    – let the market decide whether and how much to decide to invest in alternative energy.

    True, changing the gas tax rate and standard deduction requires changes to software. But, those rates are set via configurable data and won’t require recompiling/redistributing the software, new IRS bulletins, etc.

  21. wunsacon commented on Sep 4

    kevin_r, thanks for the interesting perspective.

  22. jasper emmering commented on Sep 4

    If only somebody came up with a commercial application for missile defense.

    Just think of it, if only 1 in every 1,000 Chinese would buy one….

  23. teddy commented on Sep 4

    kevin-r, get your head out of the clouds and keep your eye on the ball. I agree with BLD123 when he talks about piracy and lack of protection of intellectual capital. It is a matter of ethics and a code of moral conduct when laws for international protection of those rights are ignored and unenforceable.

  24. mentalmodel commented on Sep 4

    I’ve heard quite a bit of anecdotal evidence of Chinese researchers who choose between menial, low paying lab tech jobs in the US (post doctoral fellow), and healthily funded research professorships in China.

    The WSJ ran an interesting story a few months ago about US university departments that disenfranchise tenured professors that refuse to patent their work, or establish a program of research in a trendy area. Sharon Begley recently wrote about the difficulty theoretical physicists have who don’t decide to work on string theory.

  25. BDG123 commented on Sep 5

    I’m not sure what to imply from this last statement. Are you stating that a top notch researcher of Chinese heritage is going to be given a shit job on the US because he is Chinese? And, that the free markets don’t work? That someone capable of curing cancer is going to be given a lab tech job paying $35,000 a year because his ethnicity isn’t the right type? I guess you’ve never worked in research.


  26. x commented on Sep 12

    Correct link for graphic


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