2009 Global R&D Outlook : Industry Market Trends

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March 31, 2009

2009 Global R&D Outlook

By David R. Butcher

In recent years, global effects have slowed R&D growth. Nonetheless, a number of signs point to increased spending in the R&D field for the coming year.

In its World Economic Outlook, published in October 2008, the International Monetary Fund (IMF) stated that the quickly decelerating world economy would affect global research and development (R&D), with some global R&D growth absorbed by the inflation rate for a net result of flat R&D spending. Already, slower sales and lower earnings in today's uncertain economic climate have exacerbated the disparity between budgeted projections and performance and have diminished the resources available for new R&D investment.

Even in Asia, global effects have slowed such R&D growth. The combined share of the U.S. and Japan — the two largest R&D-performing countries, according to the National Science Board's (NSB) Science and Engineering Indicators 2008 report — declined from 56 percent of the total in 1995 to 48 percent in 2005.

"Liberalization of economics, breaking of barriers, movement from suppliers of material parts to suppliers of intellectual inputs, and aggressive investments in science and technology capacity by both government and industry have all contributed to a major shift in the global R&D picture," states the 2009 R&D Funding Forecast from Battelle and R&D Magazine.

Nonetheless, amongst all the negative indicators, a number of signs point to notable growth in the R&D field this year.

The latest joint Battelle/R&D Magazine R&D funding forecast, released in December, expects global R&D spending to reach $1,140 billion this year, 3.2 percent higher than in 2008.

Industry Sources the Biggest Contributor to R&D in U.S.
"The U.S. continues to lead the world in terms of total investment in research and development, at about $360 billion during 2007," Plunkett Research claims. "However, it ranks second in terms of R&D as a percent of gross domestic product (GDP) at 2.6 percent."

Battelle and R&D Magazine predict that industry sources will be the biggest contributor to R&D by far, expected to fund $252.8 billion in industry R&D, $3 billion in academia and $1.6 billion in nonprofits.

The 2009 R&D Funding Forecast estimates that spending in the U.S. will reach $383.5 billion this year, up from $377 billion in 2008. However, when corrected for inflation, real spending will likely decrease by about 1.6 percent due to an expected 2.9 percent decrease in federal support and a 1.3 percent decrease in industrial funding, as expressed in inflation-adjusted dollars.

The most recent data from the National Science Foundation (NSF) show a $3.5 billion decline in federal funds obligated for R&D and R&D plants (facilities and fixed equipment) — from $116.7 billion in FY2007 to $113.2 billion in FY2008. Adjusted for inflation, the data reflect a 4.8 percent decrease in R&D and R&D plant obligations. The expected FY2008 total is 7.3 percent lower (in constant dollars) than that recorded in FY2005.

Funding in both research and development contributed to the downward trend. Research, estimated to total $54.7 billion in FY2008, and development ($56.6 billion) are expected to be down, in constant dollars, 2.5 percent and 6.5 percent, respectively, from their prior-year levels.

The NSF's FY2008 data show that for the first time, the Department of Energy research budget is expected to exceed that of the Department of Defense.

Battelle and R&D Magazine forecast the U.S. federal government will spend a total of $99 billion on R&D in 2009. Of this amount, $24.9 billion is expected to be spent in government laboratories, $24.6 billion in industry, $29.8 billion in academia, $14.27 billion in the "Federally Funded R&D Centers" and $5.55 billion in nonprofit institutions.

In the U.S., the World Economic Forum's (WEF) latest Global Competitiveness Report cites "an excellent university system that collaborates strongly with the business sector in R&D." These qualities, combined with the scale of opportunities afforded by the sheer size of the domestic economy — the largest in the world by far — "make the U.S. the most competitive economy in the world."

Indeed, academia and other nonprofit organizations are expected to equally share the remainder of the funding that is directed toward R&D in 2009, according to Battelle and R&D Magazine. About $10.6 billion will likely derive from academia's own funds, and an additional $3.3 billion will come from state and local government funding. Nonprofit institutions should provide a total of about $10.1 billion.

Asia Grows as Major Player in Global R&D Efforts
As in recent years, continued expansion of R&D in Asia is fueling much of the growth in worldwide R&D spending.

Highlights of the Battelle/R&D Magazine report state:

[India] is becoming a top player in biopharm, automotive, IT/software, and IT-enabled services. China's strength is built upon large scale/low cost manufacturing capabilities while India adds value to its customers' products with large scale/low cost intellectual property. Both countries continue to churn out more engineers and technical specialists than their Western counterparts. Japan, which is not an emerging but established economy, is the second largest spender in the world on R&D, but will soon be surpassed by China.

India's government, according to its Ministry of Science and Technology, invested about 0.8 percent of GDP in R&D during the fiscal year ending in March 2005. Since then, for 2006, 2007 and 2008 each, India's national budget increased the amount going toward education by 20 percent. The government has taken a number of various steps to "rejuvenate and promote" the country's science research.

Japan enjoys a major competitive edge in the areas of "business sophistication and innovation," which the WEF characterizes as "a high availability of scientists and engineers, high company spending on R&D and an excellent capacity for innovation." Japan and the U.S. provided close to 60 percent of the estimated $772 billion Organization for Economic Cooperation and Development (OECD) total in 2005, little changed from 61 percent of the $480 billion OECD total in 1995.

Meanwhile, China remains a world force in R&D, with one of the fastest-growing research budgets in the world. It is one of the largest exporters of high-tech products, dominated by communication equipment, and is also the largest exporter of information and communication technology.

"Innovation is becoming another competitive advantage in China, with rising company spending on R&D coupled with strong university/industry research collaboration," according to highlights of the WEF report. In the WEF's latest rankings, China is up four places from the previous year.

By 2020, the Chinese government's goal is to invest 2.5 percent of GDP annually in research, which will make the country rank third in the world in terms of total annual investment. In 2007, its government invested about 1.49 percent of GDP, excluding R&D expenses at labs owned by foreign companies.

Before it becomes a sustained world player on the R&D platform, however, China must put in place a number of policy issues, including moving to a more innovativion-driven growth model, building an enterprise-centered national innovation system and strengthening innovation governance, according to the OECD.

Where the Money Will Go
This vision of science as economic savior is shared worldwide and spans across sectors.

Due to high global demand for electricity and transportation fuels, rapidly growing sectors in the geographic areas above include virtually all sectors within the energy field: renewables, such as solar power and wind turbine systems; oil-exploration technologies, despite the recent downturn in oil prices; superconductivity; and nuclear generation.

Moreover, "the convergence of information technology (IT), biotechnology and nanotechnology is fueling the imaginations and the research budgets of scientists and engineers," Plunkett Research notes. Significant research emphasis "is also placed on chemicals, health care, defense, transportation, telecommunications, chips and computer hardware and software."

Furthermore, biotechnology "is overtaking conventional chemical-based pharmaceuticals and big pharma may save small biotech firms by funding them in exchange for products to fill their pipelines," Battelle and R&D Magazine findings indicate.

Finally, as global demand for clean water grows (both from humans and from industrial and agricultural communities), "development of clean water supplies will go hand-in-hand with the development of new manufacturing processes that use less water," according to the 2009 R&D Funding Forecast.

"All this means the R&D spending likely will be a work in progress with unforeseen changes affecting the amount of money available, much of that hinging on the eventual price of oil," Battelle and R&D Magazine conclude.

Resources

World Economic Outlook
International Monetary Fund, October 2008

Science and Engineering Indicators 2008
National Science Board, January 2008

2009 Global R&D Funding Forecast
Battelle and R&D Magazine, Dec. 18, 2008

Global Growth Continues While U.S. Spending Slows...
Battelle and R&D Magazine, Dec. 18, 2008

Engineering & Research Trends
Plunkett Research, Ltd.

FY2008 Data Show Downward Trend in Federal R&D Funding
by Melissa F. Pollak
National Science Foundation, January 2009

2008 Industrial R&D Investment Scoreboard
European Commission, October 2008

Brussels Wants Doubling of Tech R&D
by David Meyer
BusinessWeek, March 16, 2009

Expenditure on Science and Technology
India Dept. of Science & Technology, March 11, 2008

India's Ranking in Terms of Quality of Scientific Research Institutions
India Dept. of Science & Technology, Feb. 27, 2008

The Global Competitiveness Index Rankings and 2007-2008 Comparisons
World Economic Forum, Oct. 8, 2008