As more organizations switched their focus onto core business priorities and attempted to reduce costs in any "non-essential" fields throughout the recession, research and development budgets in both the private and public sectors in the United States suffered a significant decline. However, with the economic recovery underway, innovation spending is likely to become a key factor in competitiveness on a corporate and international level.

According to a May report from the National Science Foundation, U.S.-owned businesses and U.S. affiliates of foreign companies engaged in research and development activities generated $11 trillion in worldwide sales in 2008. Global R&D expenditures totaled $330 billion, of which $234 billion was spent on research conducted in companies' own facilities in the U.S.

Manufacturing companies accounted for 71 percent of total worldwide R&D spending and 67 percent of R&D spending in the U.S. in 2008. Among manufacturers, the highest R&D expenses were devoted to: pharmaceuticals and medicines ($70 billion); semiconductors and electronic components ($29 billion); motor vehicles, trailers and parts ($24 billion); communications equipment ($15 billion); aerospace products and parts ($13 billion); and computers and peripheral equipment ($13 billion).

Following a severe decline last year, industrial R&D funding in 2010 is expected to increase 2.8 percent to reach $283 billion, up from $275.3 billion in 2009, but still below the 2008 total of $289.1 billion, according to the 2010 Global R&D Funding Forecast from R&D Magazine and independent R&D firm Batelle.

"Industrial R&D took a real hit in 2009 in both funding and performance," Marty Grueber, a research leader at Battelle and co-author of the report, said in an announcement of the findings. "And while it's forecast to rebound in 2010, it still won't reach 2008 levels."

Small businesses are contributing significantly to the current R&D rebound and, in fact, are leading the nation in the development of new technologies with both economic and scientific value.

A separate report from the NSF, published in March, found that between 2003 and 2007, R&D performance by small companies grew faster than in larger companies, rising from $36 billion to $50 billion over a five-year period and increasing small businesses' share of total R&D funding to 18.7 percent. R&D funding from companies with 5-24 employees grew at an annual rate of 14.7 percent over the same period and by 16.7 percent among firms with 50-99 employees, compared to the national average of 4.5 percent growth.

"Without the organizational barriers that often impede risk taking at larger companies, small businesses produce many of the radical innovations that lead to groundbreaking new products and even new industries," the NSF report explains. "From air conditioning to optical scanners, from solid fuel rocket engines to personal computers, small-business innovations have helped to transform American society while making important contributions to national economic growth."

"So the next time you read a story in the newspaper about some giant company's latest R&D project, remember that small companies you've never heard of are devoting even more of their resources to R&D," small business expert Scott Shane recently wrote at the AMEX OPEN Forum. "In industries where R&D matters to success, small companies are the ones betting the most on coming up with technological innovations."

On a national level, new research indicates that a greater focus on R&D could yield significant financial gains. If R&D spending had been treated as an investment in national income and product accounts, the gross domestic product (GDP) would have been an average of 2.7 percent higher between 1998 and 2007, according to a June report from the U.S. Department of Commerce.

"R&D accounted for about 6.3 percent of average annual growth in real GDP — that is, GDP adjusted for inflation — between 1998 and 2007, and 6.6 percent between 2002 and 2007," the Commerce Department explains. "To put the contribution of R&D in perspective, the business sector's investment in commercial and other types of structures accounted for just over 1.3 percent of average annual growth in real GDP between 1998 and 2007."

The data suggest that an increased focus on R&D funding, particularly among small businesses, could strengthen the economic recovery.

Government support in increasing R&D spending and setting conditions that encourage innovative research will be vital to maintaining U.S. competitiveness. Although the U.S. is still the world's largest spender on basic research and is dominant in R&D performance, the country's lead has been dropping in recent years.

"[A]s a percentage of GDP, funding for scientific research has dropped from 2003 levels," Inc.com reports. "What's more, the federal contribution to R&D is now below 1 percent of GDP, a commonly accepted minimum goal for economically developed countries. Meanwhile, our global economic competitors are seizing the opportunity."

In the future, successful R&D projects in the industrial sector will depend not only on increased funding, but also better integration of research principles into production capabilities.

"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 percent to 6 percent annually, while that for major Asian competitors was over 10 percent, including over 20 percent in China," IndustryWeek explains. "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."

For qualified small businesses interested in expanding their R&D focus, the federal government and local governments offer a wide range of research grants and funding opportunities.

Earlier

Diverse Prospects for R&D Funding

Q&A: futurethink's Lisa Bodell on Innovation

U.S. Science and Engineering Report Card

Resources

U.S. Businesses Report 2008 Worldwide R&D Expense of $330 Billion...
by Raymond Wolfe
National Science Foundation, May 2010

2010 Global R&D Funding Forecast
by Martin Grueber and Tim Studt
Battelle and R&D Magazine, Dec. 22, 2009

Batelle - R&D Magazine Report Shows Emerging Economies Drive Global R&D Growth
Battelle, Dec. 22, 2009

Indicators of U.S. Small Business's Role in R&D
by Lawrence Rausch
National Science Foundation, March 2010

Small Business R&D
by Scott Shane
AMEX OPEN Forum, June 17, 2010

2010 Satellite Account Underscores Importance of R&D
U.S. Department of Commerce, June 30, 2010

Why We Need More Funding for Big Science
by Adam Bluestein and Amy Barrett
Inc.com, July 1, 2010

The Competitive Edge — is U.S. R&D Investment Holding Up?
by Thomas Duesterberg
IndustryWeek, April 21, 2010

Research Grants for Small Businesses
Business.gov, June 25, 2010