FEW DOUBT THE LINKAGE BETWEEN BASIC RESEARCH and technological innovation. Historically the US government has funded the majority of basic research done in the US. However, government spending on basic research as a percentage of GDP has been declining for the last 20 years. What is the future of innovation in America?

We’re all familiar with the term research and development (R&D). It’s a phrase measuring the amount of money a corporation invests in gathering new knowledge or creating new products. Investors use a corporation’s expenditures on R&D as one factor in determining its potential for growth and competitiveness. But let’s dig a little deeper into the macroeconomic view of R&D.

First, let’s focus on the research component of R&D. Research can be divided into two sub-components: basic and applied. The National Science Foundation (NSF) defines basic research as “systematic study directed toward fuller knowledge or understanding of the fundamental aspects of phenomena and of observable facts without specific applications towards processes or products in mind”. Applied research focuses on acquiring knowledge related to solving a particular problem or meeting a particular need.

Why do we care about research? Well, basic research breeds innovation. This is evidenced throught the increase in patents filed over the last 5 years and the corresponding rise in these patents’ citations to scientific literature. More and more patents rely on core aspects of basic research.

Universities responsible for basic research are acting as publicly subsidized incubators. The Massachusetts Institute of Technology (MIT) has spun off 4,000 companies with 1.1 million employees and annual revenues of $232 billion, according to the Alliance for Science and Technology Research in America (ASTRA).

If basic research breeds innovation then innovation breeds economic growth. Several studies have indicated that 45-75% of all economic growth is directly attributed to innovation. It manifests itself in high-tech job creation, new infrastructure technologies like the telecom/internet industry and technology enabled, ‘new’, business models.

So what is the primary funding source of basic research in the US? Well, in 2003 the US government was responsible for funding 85% of all basic research (60% Federal, 25% State/Local) most of which was performed in universities and national laboratories. Private industry funds the remaining 15%.

The trend in government subsidized basic research is disturbing:

  • Federal funding for basic research grew moderately in the 1990s.
  • Funding for the Physical Sciences and Engineering has flattened since 1980
  • Federal Funding for Physical and Mathematical Sciences and Engineering are now .16% of GDP compared to .25% in 1980.
  • The US government’s fiscal year 2005 budget proposed record funding for federal development due to large increases in defense and homeland security expenditures. Because of severe restraints on discretionary spending, most federal basic research and even favored R&D agencies of past years, like the National Institutes of Health, will see increases barely above the expected rate of inflation of 1.3 percent.

Where are we spending our basic research money? Six departments and agencies are expected to account for 93% of research obligations in FY 2010: the Department of Health and Human Services, the Department of Defense, the Department of Energy, NASA, NSF, and the Department of Agriculture. The life sciences are expected to account for over one-half of the total research funding (54.3%). Engineering is projected to receive the next highest amount (16.9%), followed by physical sciences (10.0%), environmental sciences (7.0%), mathematics and computer sciences (5.2%), social sciences (2.2%), and psychology (1.9%), with “other sciences” receiving 2.5%.

The US economy has been milking the research done years ago in telecommunications, aerospace and electronics. The US has prospered due in part to the invention of the transistor over 45 years ago. Since 1980 the US government has under funded basic research

The basic research spending trends must be reversed. It is time for the US government to manage its deficits and invest in the future of innovation.

US executives were recently surveyed by BusinessWeek and asked: “what are the largest threats to innovation in the US economy?” The executives cited reduced R&D spending (46%), the public education system (45%) and corporate bureaucracy (36%). The online survey was conducted by BusinessWeek Research Services.

Executives get it. Will the US government?