As late into the recession as December 2008, a number of signs pointed to increased spending in the field of research and development (R&D). Even in an economic downturn, organizations are usually reluctant to cut R&D projects, viewing such activities as a source of competitive advantage.

Things have changed.

In the first half of 2009 alone, a number of factors have shaken up earlier forecasts of R&D spending. A deepening recession and the effects of $18.34 billion in the American Recovery and Reinvestment Act (ARRA) signed in mid-February have had "notable R&D effects" across sectors, according to the recently updated 2009 R&D Funding Forecast from Battelle and R&D Magazine.

Overall, including the ARRA investment, federal R&D budgets are expected to reach $165.4 billion for fiscal year 2009, a 12.5 percent increase over base level FY2009 R&D funding. "Basic research will see the most significant 'blip' in funding in 2009 due to stimulus funds, seeing more than a 35 percent one-year increase," according to the Battelle/R&D report.

Among the updated report's industrial R&D highlights:

• For the first time since 2002, the anticipated growth rate of effort directed toward new business appears to have declined;
• Changing patterns in industrial R&D are seen in the expected slowdown in the growth of professional staff, the hiring of new graduates and in R&D outsourcing; and
• Strong research-intensive industries are continuing to fund critical R&D programs, recognizing that the present economic situation will not last forever.

The ARRA included $18.34 billion toward R&D efforts, amounting to 2.3 percent of the overall stimulus funds, with $14.69 billion provided for direct R&D efforts and $3.64 billion for R&D facilities and capital equipment.

The ARRA was used to provide specific increases in R&D funding toward the Obama administration's policy goals. Four agencies — the National Institutes of Health (NIH), the National Science Foundation (NSF), Department of Energy (DOE) and National Institute of Standards and Technology (NIST) (the latter three being part of the America COMPETES Act) — account for more than 88 percent of the stimulus investment in R&D. The NIH alone accounts for $10.4 billion, or 56.7 percent, of the ARRA R&D funding.

For the most part, however, the survey respondents indicated they do not expect the stimulus package to provide much in the way of benefits to the R&D activities of their organizations. In fact, only a small percentage of Battelle and R&D's respondents believes the economic stimulus package will have a significant effect on its R&D budgets.

Academic institutions stand to receive more overall stimulus funds than industrial or government researchers, and expect to spend about three-quarters of the funds on research-based items.

Nonetheless, according to the report, academic response to the package was mixed: "delighted to have the additional funding, especially in light of decreasing funding from industry, but concerned over the short time-frame over which the stimulus funds are to be spent."

Says the report:

The survey responses indicate that the nature of R&D is such that the program would have relatively little impact, with one possible exception: the acceleration of initiatives in capital equipment acquisition. The distinction is that such equipment falls into the category of "shovel-ready" activities — something that is already specified, designed and constructed, merely waiting for sale.

"The importance of the stimulus effect on construction and capital expenditures cannot be overstated," Marty Grueber, a research leader at Battelle and co-author of the report, said in a statement. "At $3.64 billion, the ARRA alone provides an amount equal to approximately 80 percent of recent years' facilities and equipment budgets."

In light of current economic circumstances and the resultant R&D landscape, companies are cautious with their R&D costs and projects. In a recent McKinsey Quarterly survey, 40 percent of respondents said their companies were seeking to reduce R&D costs, with about the same portion trying to trim the number of R&D projects. Overall, approximately 20 percent to 35 percent of all Battelle/R&D respondents said they expect 2009 R&D budget cuts of more than 10 percent. Approximately one-third of all respondents indicated there would be no changes in their R&D budgets.

"While this tendency toward caution is understandable, other findings indicate that many companies may be overlooking longer-term opportunities to innovate," McKinsey reported in April. "Notably, the companies that get the greatest benefit from innovation appear to be taking a different approach.

"Companies that gain the greatest benefit from R&D are actually expanding their programs," according to McKinsey's findings.

Battelle and R&D's updated report highlights the general agreement among all the classes of survey respondents that economic recovery will progress markedly in the fourth quarter of 2009, and it will be largely attained by the end of the third quarter of 2010.

"Based upon past experiences and observations of earlier slowdowns (and reversals) in R&D spending, this pattern of behavior suggests that the recovery in R&D spending will be evidenced in the first half of 2011," the report makes clear. "To the extent that this is a reasonable expectation of reaction to general economic conditions, the current and near-future trough in spending would not last as long as other similar past slow-downs and/or reversals."

Earlier: 2009 Global R&D Outlook

Resources

2009 Global R&D Funding Forecast Update: Making Sense of 2009's R&D Changes
by Jules Duga, Martin Grueber and Tim Studt
Battelle and R&D Magazine, June 11, 2009

Extraordinary Economic Factors Drive Overhaul of 2009 Global Forecast
Battelle and R&D Magazine, June 11, 2009

R&D in the Downturn: McKinsey Global Survey Results
McKinsey Quarterly, April 2009