• Sat. Jul 13th, 2024

Breaking Down Private Sector Research and Development

Over the past decade, total U.S. expenditure on research and development (R&D) has nearly doubled. However, this growth has been unequal across performing sectors (public, private, academic, and non-profit). At the beginning of the 1980s, the private and public shares of total U.S. R&D funding were roughly equal, but by the 2020s, the private sector was investing over three times more than the public sector, a trend we explored in a previous newsletter. This week, we dive into private-sector R&D and look at which industries are driving this surge in R&D activity.

Funding for private sector-performed R&D totaled $602 billion in 2021 across all sectors, accounting for 75 percent of the U.S. total ($806 billion) and with the majority ($527 billion) being self-funded. Going a level deeper, the bulk of that spending, about 79 percent, was focused on development, while 7 percent and 14 percent were allocated to basic and applied research respectively.

Across three key metrics of innovative activity—total R&D expenditure, domestic R&D employment, and R&D intensity*—four industrial subsectors stand out**: pharmaceuticals and medicines, computer and electronic products, information technology (software and non-software), and computer systems design and related services. Companies in the manufacturing sector accounted for slightly more than half of the total expenditure compared to nonmanufacturing sectors. What are the implications of this data?

First, it dispels prevalent myths about manufacturing. In advanced industries like pharmaceuticals and semiconductors, perfecting the manufacturing process is just as scientifically sophisticated as the research conducted to design or synthesize a product.

Second, as the United States looks to compete in critical industries, policymakers should consider the R&D-intensive nature of strategic sectors like biopharmaceuticals, computer products, and IT. These are research-to-win industries, where technological leadership and business leadership often reinforce one another.

Beyond grant programs and tax credits, to support these sectors, lawmakers must promote a policy environment which eases the path to commercialization for innovations derived from long- and medium-term R&D. This includes maintaining a robust and predictable intellectual property protection regime, responsibly lowering barriers to international scientific collaboration, and investing in the basic research performed at universities, federal agencies, and National Laboratories.

For American audiences, “industrial policy” is often associated with subsidies for specific industries or characterized as an exercise in “picking winners”. Less appreciated are the indirect ways in which policies can drive and enable technological innovation across sectors that rely on significant R&D activity to remain competitive.

*R&D intensity as defined by the National Science Foundation is the ratio of a firm or industry’s total R&D expenditures to total sales revenue. It indicates how much of a firm or industry’s revenue is reinvested in its R&D activity. 

**The authors excluded the scientific research and development services (SRDS) subsector from the data visualization given that the unique nature of the subsector’s business activities, including conducting R&D as a service, made it a significant outlier in terms of 2021 R&D intensity (41.2 percent). The SRDS subsector spent $34.14 billion on R&D—of which $28 billion came from external funders—and domestically employed 130,000 individuals for R&D activities in 2021.

Data visualization by William Taylor


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