Make Strategic, Long-Term Investments in Science and Technology

Fortify the U.S. Research and Development (R&D) Base

Investment in R&D is a foundational building block for innovation. A sustained historical commitment to making strategic, long-term investments in science and technology over multiple decades put a man on the moon in eight years, created the internet and modern computing industry, and established the United States as the global leader in the development of cutting-edge technologies.

While private-sector R&D investment has accelerated over the past 30 years, the federal government’s willingness to make long-term, strategic investments in R&D has diminished. Investments in basic research and foundational science — the early stages of the R&D pipeline in which federal involvement is particularly important — are key to supporting advances in critical underlying technologies, such as artificial intelligence, quantum computing, advanced robotics, aerospace and advanced medicine. Also key is creating and maintaining the right conditions for American businesses to make what are often risky and long-term investments in developing, testing, commercializing and deploying new technologies.

It is time to apply to the new innovation economy the same ambition and national commitment that enabled the United States’ historic leadership role. A shared commitment to making smart, sustained and strategic investments in R&D will mean that more of the world’s intellectual property and more high-value jobs are created in the United States and that more American businesses are the standard bearers for innovative technologies and processes.

Total U.S. R&D investment is robust and has increased over time.

• Total U.S. R&D investment reached a record-high $511 billion in 2016 — including public, private and other sources of investment — which is a 3 percent increase over the prior year and an 89 percent increase relative to 2000.
• However, when measured as a share of gross domestic product (GDP), U.S. total R&D investment has barely budged in recent years, remaining at approximately 2.7 percent.
• Federal funding for R&D since 2000 has been characterized by significant volatility from year to year and by slower growth than overall R&D investment. Federal funding for R&D increased only 31 percent from 2000 to 2016, while total national R&D investment grew by 89 percent.

Historically, the U.S. government made a much larger contribution to national R&D investment than it does today.

• Beginning in the early 1980s, businesses began contributing the majority of U.S. funding for R&D, and the gap between private and public funding has widened in recent years.

• Today, the private sector funds 64 percent of R&D in the United States, more than 2.5 times what the federal government spends.
• Federal government R&D spending as a share of GPD has fallen from 1.2 percent in the 1970s to just 0.7 percent today.
• Although the public sector is typically expected to be more active in basic stage R&D investment, the U.S. federal government accounts for about 12 percent of total basic research, less than half of private-sector spending, which stands at 26 percent.

The United States is still a global leader in R&D, but its lead is diminishing.

• In terms of total investment in R&D, the United States continues to outpace the world. Other top countries include China, Japan, Germany and South Korea.
• In terms of investment as a share of national GDP, the United States ranks 10th behind nations such as Israel, Japan, Switzerland and Germany.
• While U.S. government R&D spending turned down following the recession, China’s federal R&D spending has steadily increased over the past two decades. The gap between U.S. and Chinese federal R&D investment is now almost one-third what it was in 2008 ($34 billion in 2015 compared to $89 billion in 2008).

• The United States currently ranks near the bottom of its OECD peers on the “B-Index”, which measures the amount of profit necessary to justify R&D expenditures.

Policy Recommendations

1. Boost federal funding for R&D, with a focus on strategic investments in basic research.
2. Develop and implement whole-of-government strategic planning for R&D. The federal government should develop and execute a whole-of-government approach for strategic R&D investment, including a clear articulation of near-, medium- and long-term research priorities. A whole-of-government strategic plan should include clear and specific objectives and benchmarks, results-driven planning and execution, a predictable funding stream, and effective coordination and collaboration across agencies and federal labs.
3. Increase funding for basic R&D. The federal government should build on last year’s increase in funding for basic research to sustain a 4 percent annual growth rate, adjusted for inflation, in federal spending on basic research in the coming years. Such a trajectory would be consistent with long-term historical growth rates in federal spending on basic research that were sustained from the 1970s through the 1990s.
4. Improve collaboration among federal research labs, universities and the private sector. Improve and expand collaboration to accelerate the transition of promising technologies from the laboratory to commercialization in the marketplace:
5. Incentivize and support regional cluster initiatives. The federal government should support regional cluster initiatives by funding grants and innovation challenges that promote local community development, incentivize industry-aligned workforce preparedness programs, and strengthen information-sharing and monitoring efforts around cluster initiatives. This effort includes:
6. Focusing federal support on providing robust, long-term and predictable funding streams to help scale up innovation clusters and advance a forward-looking vision for local economic growth through innovation.
7. Maintaining and expanding existing federal funding channels, including competitive matching grant programs, such as the Economic Development Agency’s i6 and Seed Fund Support programs, which serve as useful “one-stop shops” for funding, information exchanges and expert assistance for local innovators and entrepreneurs.
8. Expand collaborative research partnerships. The federal government and federal research agencies should promote industry-university collaborative research partnerships to ensure that advances in early-stage research can proceed through the commercialization pipeline. The government should expand programs such as the National Science Foundation’s Engineering Research Centers and Industry-Cooperative Research Centers, which leverage public-private partnerships to achieve these objectives.
9. Incentivize private-sector R&D in the United States.
10. Preserve a tax code without systemic barriers to U.S. R&D. The federal government should preserve a competitive corporate tax rate and international tax rules that foster U.S. innovation and R&D.
11. Ensure tax credit competitiveness. The United States. should maintain a tax incentive structure for private-sector R&D investment that equals or exceeds that of other developed economies. This structure should continue to include the ability to expense research expenditures (currently set to expire after 2021) and should streamline the process for claiming R&D tax credits. 
12. Incentivize a long-term view of value creation and R&D. The government should also partner with the business community by supporting corporate governance initiatives to enable companies to focus on long-term growth and risk management rather than pursue short-term gains, a critical condition for undertaking long-term and often-uncertain R&D ventures.
13. Ensure the fitness of the patent system. The federal government should strengthen the U.S. patent system by promoting the reliability, certainty and quality of patent rights to encourage innovation, business investment and emerging industries.