The Competitive Edge -- Is U.S. R&D Investment Holding Up?

April 11, 2010
Data trends suggest that U.S. dominance of high-technology manufacturing is under pressure.

One of the great strengths of the U.S. economy is its deep tradition of research and innovation. Despite relentless foreign competition, U.S. R&D leadership has held up well in recent years. But worrisome signs are on the horizon.

When measured on a value-added basis, U.S. manufacturing is the global leader in high-technology goods: it holds around a 30% global market share, about the same as in 1995. This leadership is founded on our dominant position in global research expenditures, and on the excellence of our scientific and engineering research institutions. According to estimates produced for R&D Magazine, U.S. R&D expenditures in 2010 will be about $402 billion, slightly ahead of all Asian countries and well ahead of Europes $268 billion. The market share for the United States is about one-third of all research done worldwide. Two-thirds of all R&D expenditures in the United States come from industry. As a proportion of GDP, the United States devotes more to R&D than all other countries except Japan and South Korea.

In recent years concerns have been raised about U.S. firms doing more research outside of the country. According to data from the National Science Foundation (NSF), however, the United States is still the home for about 35% of all global R&D, although it is losing market share to Asia, where about one-third of all R&D is performed. The latest data available (for 2006) show that R&D expenditures by foreign affiliates of U.S. multinationals are about 20% less than that performed in the United States by affiliates of foreign multinationals.

Several series of data, however, show cause for concern. We have known for some time that the United States has lost its global leadership in exports of high-technology goods. In 2008 the nation lagged behind both China and Europe in this broad category, although the picture is probably somewhat different if we take into account the fact that many imports of high-tech goods have substantial U.S. content.

Of greatest concern are two trends. First, the rate of growth in U.S. R&D expenditures is low, while that of emerging economies is expanding rapidly. Between 1996 and 2007, U.S. growth was 5% to 6% annually, while that for major Asian competitors was over 10%, including over 20% in China.

Second, in manufacturing we know that R&D only leads to real product innovation when coupled with the experimentation in production facilities needed to perfect products and processes and adapt the products to consumer preferences. Metrics for fixed investment in plants and equipment in the United States reveal a very troubling pattern. China and India devote more than 42% and 32%, respectively, to fixed investment on a regular basis (these figures are for 2009), while the United States only managed 12.5% in the recession-plagued year 2009. More pertinent to manufacturing is the fact that China manages to allocate more than 12.5% of its economy to machinery and equipment investment each year, while the United States only reaches about 6% in this category, down from over 9% in the 1990s. If depreciation is taken into account, we probably experienced a net decline in machinery and equipment in 2009! Manufacturers Alliance/MAPI research also has shown that total manufacturing capacity declined in 2009, driven by a decade-long slowdown in the number of new plants opened each year.

These longer term trends suggest that U.S. dominance of high-technology manufacturing is under pressure not only from growing foreign competition but also from inadequate domestic investment. Such a decline has implications for the strength of our economy in terms of technological leadership, productivity growth, and hence our standard of living, but also for our national security leadership. Public policy will need to respond to these developments in the near future.

Dr. Duesterberg is president and CEO of the Manufacturers Alliance/MAPI, an executive education and business research organization in Arlington, Va.

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