PAGE 1 An Innovation and Competitiveness-Centered Approach to Deficit Reduction BY ROBERT D. ATKINSON JANUARY 2014 THE INFORMATION TECHNOLOGY & INNOVATION FOUNDATION JANUARY 2014 In an earlier paper
termed Innovation Economics, which stresses why decisions on taxes and spending should be driven by the need to promote economic growth.
Rather than concentrating on boosting aggregate demand or reducing the federal debt, policymakers should be guided by the need to reduce the debt-to-GDP level over the medium term,
in part by ensuring that budget policies support investments and tax expenditures that drive GDP growth and that boost overall work effort.
In addition to the fiscal deficit, America also faces deficits in investment and competitiveness that are equally important. 2 The best solution is to choose a mix of regulatory reforms, investment increases,
spending cuts and tax increases that promote investment and make America a more competitive place to do business.
Merely increasing federal spending to boost aggregate demand or treating all spending and taxes the same (e g.,
putting everything on the table) can easily weaken the economy over the medium term, making it harder to reduce the debt-to-GDP ratio.
in part by ensuring that budget policies support investments and tax expenditures that drive GDP growth.
rather than on ways to increase economic growth. In addition, their proposals for spending and taxes seem to treat all outlays and revenues the same, regardless of their effect on growth.
Yet cutting public investment (including increasing certain business tax expenditures) in the name of fiscal discipline will slow growth
but it would also increase the investment deficit, reducing the rate of innovation and productivity growth.
Both effects would reduce economic growth, resulting in total budget savings significantly lower than what would be achieved by cutting true non-investment spending.
Instead of focusing solely on the budget deficit, Congress and the Administration should take a more focused approach to reducing the budget deficit by adopting policies that boost economic growth,
even if in the short run they contribute to the budget deficit, while also cutting unproductive spending and raising taxes on individuals.
DISTINGUISHING BETWEEN PRODUCTIVE INVESTMENT AND CONSUMPTIVE SPENDING BUDGET POLICIES To effectively address the budget while also growing the economy,
policymakers should do four things. The first two focus on increasing GDP growth rates, the second two on reducing the budget deficit. 1. Increase investments,
including business tax expenditures, which spur productivity, innovation and competitiveness (PIC) by boosting spending on public investment
and cutting taxes on business (including cutting statutory rates, expanding pro-growth incentives, and also rolling back ineffective tax breaks).
a. Creating a comprehensive tax credit for business investments in R&d, new equipment, and software and workforce training;
as opposed to investment. The focus should largely be on cutting entitlements to seniors, but also on areas of spending that lower productivity (e g.,
a. Instituting progressive indexing that indexes SSI benefits to wages for low-income workers and to inflation for high-income workers;
investment and trade deficits and will also spur growth which will help reduce the debt-to-GDP ratio. 4 An increase of just 0. 1 percent in the GDP growth rate would reduce the budget deficit by as much as $300 billion cumulatively over the next decade. 5 Given the economy's poor
performance over the last few years, a determined focus on policies to promote growth could boost GDP by as much as one percentage point each year.
they also need to distinguish between productive investment (expenditures that expand productive capacity, drive economic growth and increase future incomes)
and consumptive spending (expenditures that finance consumption of goods and services but do not lead to increased future productivity).
To distinguish between taxes and PAGE 4 THE INFORMATION TECHNOLOGY & INNOVATION FOUNDATION JANUARY 2014 spending that support investment versus consumption,
policymakers should consider four criteria: Productivity: Does the program or policy encourage organizations to produce more goods and services with fewer inputs?
6 Innovation: Does the program or policy encourage organizations to create new products, services, processes,
or business models that add value or create new industries? Competitiveness: Does the program or policy reduce the trade deficit by making it more attractive to locate productive activity in the United states rather than other countries, thereby increasing exports and/or reducing imports?
Work Hours: Does the program or policy increase the amount of work hours per-capita by encouraging those workers who are able to work to enter into
but by increasing investment and spurring more work effort, America can begin closing its three deficits
Tax Cuts and Investment Increases Tax increases and Spending cuts Corporate Tax Reductions Tax increases Establish an innovation
and investment tax credit Lower the corporate tax rate Increase taxes on individuals Introduce new taxes (e g.,
, carbon taxes) that do not significantly slow growth Broaden the tax base Increased Outlays Reduced Outlays Research and development Education Transportation infrastructure Federal IT investment Limit entitlements Boost government efficiency Reduce industry
which, for many of the tax reductions and investment increases, we believe would be significant.
INCREASE INVESTMENTS, INCLUDING CUTTING BUSINESS TAXES A growth-oriented budget plan needs to encourage productivity-enhancing investments by the private and public sectors. This means reduced taxes on business, particularly on investments,
while also cutting the corporate rate will help move the United states away from a consumption-centered economy to an investment-centered one.
whether Congress should increase tax incentives for investment or reduce the corporate tax rate. Congress should do both.
Increase Tax Incentives for Investment Business investment in R&d new equipment and software and workforce training drive PIC.
However, in the last decade, the United states has fallen behind other nations in investment in these key building blocks. 8 As a result,
Congress should create a comprehensive tax credit for business investments in R&d, new equipment and software,
Such action would provide a tax credit of 45 percent of business investments on R&d and skills training,
However, once the effects of induced investment and higher economic growth were taken into account, ITIF estimated that the expanded credit would pay for itself after 15 years. 9 In other words,
whether Congress should increase tax incentives for investment or reduce the corporate tax rate. Congress should do both.
including for manufacturers. 10 The evidence shows that higher corporate rates reduce economic growth, including reduced international competitiveness. 11 As a result,
since their profits in more nations would be taxed at a higher rate than in the United states
or nothing to repatriate foreign profits. ITIF has estimated earlier that this change would cost the government $100 billion per year on a static basis. 13 However,
a lower rate would spur more investment, in part by increasing the after-tax returns from investments
and by reducing the incentive to move production offshore and encouraging more foreign companies to locate business activity here.
Policies that reward productive investment clearly increase the capital stock of the economy in turn producing higher incomes and more tax revenue.
Investment in R&d, Education, Infrastructure and Government Efficiency Federal public investment can be defined as those expenditures made today by government that produce income for the United states with a net present value greater than the cost of the expenditure.
While some on the left want to call all favored spending investment in order to place a greater veneer of respectability on it,
Federal spending is truly investment only if it yields returns in excess of PAGE 7 THE INFORMATION TECHNOLOGY & INNOVATION FOUNDATION JANUARY 2014 expenditures.
America faces an investment deficit and increased public investment along with incentives to spur private investment is needed to remedy it. 15 In particular, Congress needs to increase public investment in four key areas:
science and technology, education and skills, surface transportation infrastructure and federal information technology (IT) investment. Although these policies would also increase the deficit,
they would have similar dynamic effects to those discussed above, which would partially or perhaps fully offset the cost.
Science and Technology The United states is in a global competition for innovative advantage. 16 Our international competitors have been strategically ramping up their public investments in research over the last two decades
while U s. investments have grown much more slowly. In terms of federal funding for nondefense R&d as a share of GDP
the United states ranked just twenty-eighth out of thirty-four nations studied by the OECD in 2010.17 And in terms of government investment in university research, of thirty-nine nations,
Congress should also increase funding for research that is focused more on commercial innovation and U s. competitiveness. 22 Education and Skills In a more knowledge-based economy,
a well-educated and trained workforce contributes to economic growth and competitiveness. 23 As a result, in addition to expanding the R&d tax credit to include corporate expenditures on training,
There are several areas that should be targeted for investment, including science, technology, engineering and mathematics (STEM) education, manufacturing skills standards,
while the required investments amount to nearly $100 billion per year. 25 Congress should increase the gas tax by 35 cents per gallon
and then index it for inflation. This would raise approximately $45 billion per year which should be devoted to the Highway Trust fund. 26 At the same time,
Congress needs to increase public investment in four key areas: science and technology, education and skills, surface transportation infrastructure and federal information technology investment.
PAGE 8 THE INFORMATION TECHNOLOGY & INNOVATION FOUNDATION JANUARY 2014 Federal IT Investment A strategy to boost the productivity of the federal government should be a key part of any budget reduction strategy.
Mckinsey & Company finds that a 15 percent improvement in the efficiency of federal government operations could generate $1. 3 trillion in savings over the next ten years. 27 These sorts of efficiency gains have been routine
the federal government will be able to provide the same services at a lower cost. Congress should therefore increase spending on federal IT infrastructure.
The kinds of investments and tax cuts proposed above are critical to boosting productivity. But to address the budget deficit without even larger cuts in spending
since every person added to the economy also consumes resources. The latter, expanding work hours, is more effective
Moreover, with the move to an economy with many more jobs in the services sector, the availability of jobs that require limited physical exertion has grown.
from 84.8 percent in 1990 to 78.8 percent in 2011.40 Every worker who leaves the labor force can generate a double-drag on the economy,
Economists David Autor and Mark Dugan argue that the SSDI eligibility application process should focus on objective data with specific maladies for
One reason why wages have not increased for these jobs is that the federal minimum wage has declined in inflation-adjusted dollars from $10. 77 in 1968 to $7. 25 per hour today. 48 As a result,
and by the overall competitiveness of the U s. economy. 49 Once the economy is back to full employment,
bringing the economy back to full employment. In addition, a higher minimum wage would reduce outlays from the earned income tax credit.
But this view reflects what economists call the lump of labor fallacy, which refers to the notion that the amount of work available to workers is fixed.
female workers earned money that let them purchase goods and services, which generated further demand for What is certain is that the United states will be less prosperous
as noted above, increasing critical PIC-inducing investments and increasing incentives for expanded work hours.
Reduced outlays normally come at a cost of reduced government services, funding or transfer payments. There are numerous ways to cut spending,
but to the extent possible, cuts should not harm productivity, investment, or competitiveness and should also lead to increased work hours.
Congress should institute progressive indexing that indexes SSI benefits to wages for low-income workers and to inflation for high-income workers.
The industry also has the opportunity to take a tax deduction based on production levels, which can sometimes be greater than the total amount of federal taxes on the industry.
as commodity prices are enough to encourage future investment in the development of oil and gas.
it would not raise the taxes on exported products and services. Another revenue source could be a small financial transaction tax (also known as a Tobin tax)
however, should be levied as an economy-wide carbon tax on upstream, combustible, fuel sources (e g.,
even though the proportion of national income going to those above the eightieth percentile has increased markedly. 69 Both in theory and practice,
and investment. 70 One reason for the lack of effect on the former is that as Moffit and Wilhem found,
there is not much evidence that they affect investment, which is what really matters. Currently, ordinary dividends are taxed at roughly 25 percent,
up from 15 percent before the ATRA passed. 73 Rather than leading to more investment,
there is some evidence that reduced taxes on dividends actually lead to lower levels of investment by companies as they pay out more earnings in dividend payments.
and a cutback on larger investments that take longer to receive a payback. 74 Given the significant decrease in investment in structures, equipment and software by companies in the United states over the last two decades,
the much more persuasive argument is that investment managers are essentially getting paid a salary for their investment advice.
There is nothing inherently objectionable about using the tax code as a means of social or economic policy;
and competitiveness, it will need to move from a consumption economy to an investment one, and policies that reduce spending on housing will move us in that direction.
000 of the mortgage and not be indexed to inflation. 80 A second place to start is for Congress to eliminate employment related tax benefits,
and competitiveness, it will need to move from a consumption economy to an investment one, and policies that reduce spending on housing will move us in that direction.
As such any debt reduction plan should focus on expanding growth and reducing the debt-to-GDP ratio, both by increasing growth through increased investment and reduced corporate taxes,
Innovation Economics: How a New Theory Casts Light on an Old Problem of the Budget deficit (ITIF, October 2013), http://www2. itif. org/2013-innovation-economics-new-theory-old
-problem-budget. pdf. 2. Robert Atkinson et al. Taking on the Three Deficits: An Investment Guide to American Renewal (ITIF;
Breakthrough Institute, November 2011), http://www. itif. org/files/2011-taking-three-deficits. pdf. 3. For an example, see:
Cultivate Growth, New york times, November 16, 2010, http://www. nytimes. com/2010/11/17/business/economy/17leonhardt. html. 5. Congressional Budget Office, The Budget and Economic Outlook:
A. Stewart and Robert D. Atkinson, Restoring America's Lagging Investment in Capital Goods (ITIF, October 2013),
http://www2. itif. org/2013-restoring-americas-lagging-investment. pdf. 9. This is a net cost with approximately $34 billion of offsetting savings coming from eliminating expensing.
This also includes the credit on the induced expansion of investment. See: Matthew Stepp and Robert D. Atkinson, An Innovation Carbon Price:
Djakov et al. conclude that a 10 percentage point increase in the 1st year effective corporate tax rate reduces the aggregate investment to GDP ratio by about 2 percentage points.
and Andrei Shleifer, The Effect of Corporate Taxes on Investment and Entrepreneurship, NBER Working Paper no. 13756 (2008), www. nber. org/papers/w13756. 12.
An Investment Guide to American Renewal. 16. Robert D. Atkinson and Stephen J. Ezell, Innovation Economics:
the Race for Global Advantage (New haven, CT: Yale university Press, 2012). 17. OECD, Science, Technology and R&d Statistics (science, technology and R&d indicators;
Refueling the US innovation Economy (ITIF, December 2010), http://www. itif. org/files/2010-refueling-innovation-economy. pdf,
Craig Elwell, Inflation and the Real Minimum wage: A Fact Sheet (Congressional Research Service, September 12, 2013), 2, http://www. fas. org/sgp/crs/misc/R42973. pdf. 49.
Environment Working group, EWG Farm Subsidies Statistics (Total USDA subsidies for U s. farms; accessed October 15, 2013), http://farm. ewg. org/regionsummary. php?
The Affordable Care Act added an additional 3. 8 percent tax on net investment income
Luke A. Stewart and Robert D. Atkinson, Restoring America's Lagging Investment in Capital Goods (ITIF, October 2013),
http://www2. itif. org/2013-restoring-americas-lagging-investment. pdf. 76. Congressional Budget Office, Options for Reducing the Deficit:
He is also the author of the books Innovation Economics: The Race for Global Advantage (Yale university Press, 2012) and The Past and Future of America's Economy:
Long Waves of Innovation that Power Cycles of Growth (Edward Elgar, 2005. Dr. Atkinson received his Ph d. in City and Regional Planning from the University of north carolina at chapel hill in 1989.
ABOUT ITIF The Information technology and Innovation Foundation (ITIF) is a Washington, D c.-based think tank at the cutting edge of designing innovation strategies and technology policies to create economic opportunities
and improve quality of life in the United states and around the world. Founded in 2006, ITIF is a 501 (c) 3 nonprofit,
2014 GLOBAL R&d FUNDING FORECAST U s. R&d investment up one percent to $465 billion Historic U s. commitment to research intensity expected to remain firm Economic growth continues to propel Asian R&d spending
which is a public service for use by policy makers, corporate research leaders, researchers, educators, and economists.
This perspective is based on assumptions about the economy, and on indications that our leaders in Washington may be able to find common ground on the value of R&d investment.
We are impressed by R&d commitments in Europe and Asia, where increasing research intensity amplifies the investment momentum that strong economic growth provides.
In a world where scientific discovery and technology commercialization are truly global, these trends have implications beyond national borders.
and researchers alike because of the multiplier effect R&d investment can have, both in economic and cultural terms.
There is an important relationship between economic growth and research and development, between industry creation and political stability, and between the nurturing of research
At the current rates of growth and investment China's total funding of R&d is expected to surpass that of the U s. by about 2022.5 Part I:
the combined investments by the U s.,China and Japan will account for more than half of the total.
For 2014, we project declines in defense and aerospace R&d, increases in energy-related research, increases in life science research and development, strong growth in information technology research investment and growth in R&d budgets for chemicals
Key research investment trends around the globe: Given the current, weak economic environment in Europe,
large increases in R&d investments are expected not for the next several years. Emphasis by Southeast Asian countries on economic growth through increased R&d investments is likely to continue through the end of the decade.
Significant R&d investments by western countries in long-range technology platforms like robotics, highperformance computing, social media, software, costeffective energy sources and nanobiotechnology could stimulate rapid industry
-scale economic growth. The research standouts in the Rest of the World: The Rest of the World countries are expected to undergo moderate growth in R&d investment in 2014, with leadership from countries like South korea, Russia and Taiwan.
Most Middle east countries will experience strong GDP growth in 2014, but are constrained by weak R&d infrastructure with exceptions such as Israel and Qatar.
Africa is expected to see strong GDP growth, but is limited also by underdeveloped R&d capabilities with the exception of South africa.
Strong GDP growth is expected in South america, but this region also lags in R&d capacity even Brazil appears to be under-performing expectations.
Total investments in R&d (as a percentage of GDP) will stay relatively steady throughout the world in 2014.
The 2013 slowdown was due primarily to unsettled European and U s. economies that, in turn, affected global performance.
R&d investments often are linked closely to GDP and economic outlook. Global R&d investments, according to our analysis, are forecast to increase in 2014 and 2015 albeit at a decreasing rate in 2015.
Other highlights include: Economic and R&d growth in Asian countries have slowed, but R&d investments in this region still outpace the rest of the world.
U s. R&d investment is back on track with modest growth that is expected to continue through 2020.
China continues its unmatched economic growth and double-digit R&d increases. R&d rankings have not changed significantly in the past five years,
but differences have narrowed in funding levels between countries. Asia's Role Continues to Increase While 2013 R&d investment growth was minimal in the U s. and Europe, growth in most Asian countries especially China continued.
Asian R&d investment growth rates are expected to return to their pre-2013 levels in 2014 and 2015.
The exception to this outlook may be Japan, which is correlated more with trends in the U s. and Europe than with neighboring Asian countries.
In 2014, China will continue its two-decade trajectory in R&d investment, consistent with the current Five-Year Plan (FYP 2011 to 2015.
This rate of growth is expected to continue through the end of the decade as China strives to transition from a manufacturing economy to being driven innovation by 2020.
At current rates of R&d investment and economic growth, China could surpass the U s. in total R&d spending by about 2022.
the combined investments by the U s.,China and Japan is more than half of the total.
In the same five years, Asia's share of R&d investments has risen from 33%to nearly 40%,with China rising from 10%to nearly 18%.
and its total R&d investments are now more than 60%those of the U s. The economic and political context in each of these regions suggest these trends are not likely to change in the near term
The growth rate for R&d investments in ROW countries is also low less than 4%expected in 2014.
The low rate of investment in these countries implies priorities other than innovation-based growth, and may also relate to underdeveloped domestic R&d infrastructure and educational capacity.
Differences among regions in R&d economics as well as major science and technology priorities, are narrowing. Noteworthy exceptions include China and India,
U s. R&d investment will increase by 1. 0%(after inflation) to $465 billion. National research intensity will remain stable at 2. 8%of GDP.
Total Federal government Industry Academia Other Government www. rdmag. com December 2013 R&dmagazine 9 In the current economy, R&d jobs are multiplied 3. 2x Projected
an additional 6 million U s. jobs will be supported. 2 R&d spending is amplified 2. 9x As R&d spending ripples through the U s. economy,
Long-term economic growth is linked to research intensity The most important example of long-term R&d impact is U s. economic growth in the second half of the 20th century.
Against the Office of Management and Budget's estimate of 2. 2%inflation for 2013-2014, the forecast level of R&d would be an increase of 1. 0%in real terms.
General acknowledgement that R&d investment has both short-and long-term return to the economy. Concern about maintaining U s. innovation-based competitiveness at a time
and some industries increased their investment, industry investment in R&d as a whole was flat in 2013 due to the slow global economy, continued rationalization of R&d activities in selected industries and the private-sector impact of federal budgets
and sequestration. The sequester-associated reductions in 2013 U s. R&d had pronounced a effect on university research activity, among other areas.
that industrial R&d spending is correlated with the current economy and the stability of its outlook.
Increased industry investment equates to more R&d activity, which is projected to increase by 3. 8%to more than $330 billion,
and is correlated with the business cycle and economy rather than government actions. As a group, the nation's research universities are the second largest performer of U s. R&d, accounting for 13%of the U s. total,
the recent dynamics of federal R&d funding, from increases via the American Recovery and Reinvestment Act (ARRA) investments in 2009-2011 to budget reductions in 2012
Battelle and R&d Magazine Industry Continues to Lead U s. R&d Investment Source: Battelle and R&d Magazine 32.0 29.7 31.4 10.8 10.6 11.3 10.3 10.0 5. 5 5. 6 13.4 11.5 12.1 55.3 55.1
Highlights of the academic research enterprise include: Academia performs about 60%of all U s. basic research.
the ARRA added about $18 billion of federal investments to baseline funding for academic research.
federal investments in academic R&d declined from 2012 to 2013, resulting in flat funding levels
including Johns hopkins university (including the Applied Physics laboratory), the University of michigan at Ann arbor, the University of washington at Seattle, the University of Wisconsin at Madison (including WARF), Duke university,
Times Higher education rankings Despite this positive track record, the U s. academic research enterprise faces challenges, many of which were expressed as concerns by researchers responding to the survey on
If universities are expected to perform as for-profit companies, driven by short-term returns on investment, then the foundations upon
which major high-risk scientific discoveries are made will eventually erode. As these research centers are lost slowly, so too will be lost the supply of highly trained researchers who drive innovation and competition.
-Academic Researcher/U s. 12 R&dmagazine December 2013 www. rdmag. com 2014 GLOBAL R&d FUNDING FORECAST International Overview Summary For the past six years
Southeast asia has become the world's largest region for research investments a trend that is expected to continue through at least the end of the decade.
And major infrastructure investments continue to be made, often with the goal of creating an innovation ecosystem with mechanisms for technology commercialization and industry engagement,
leading to amplified economic returns from research investment. Leading examples include Skolkovo in Russia, Biopolis in Singapore and the Qatar Foundation.
Battelle, R&d Magazine Highlights of the international research funding environment include: Asian share of global R&d continues to increase,
Globalization Unleashed Globalization of R&d has accelerated in the past decade through a combination of R&d funding growth in emerging economies, off-shoring and outsourcing of a portion of western R&d, improved communications and the need for larger-scale
while government research now turns to areas like grid accommodation of fueling demand for EVS.
and the prospects seem good for realization of the original policy goals in energy security and environmental protection that stimulated early public investment.
Linkage Between R&d and National Priorities Tepid economic recovery in Europe and the U s. suggests significant increases in R&d investments are unlikely in the next several years.
Emphasis on public deficit and debt reduction will continue, with unpredictable short-term effects on discretionary research investments.
While the historic stability of research intensity in the U s. and Europe suggests dramatic declines in national R&d investments are not likely,
and particularly in Asia, recognize the importance of investing in the building blocks of innovation-based economies.
All countries seek economic growth often amplified by the need for job creation to match rising populations:
energy, food and water demands. Strategies vary. In the U s.,the government tends to seed innovation with investment in basic research and some tax and policy incentives,
but the free market decides which technology is deployed at large scale. China, on the other hand, has fixed a macroeconomic goal of spending 2. 2%of GDP on research by 2015,
toward becoming an innovation-based economy by 2020. Such a command approach can sometimes accelerate the translation from research to development.
This is illustrated by the large proportion of development investment in China versus funding for basic and applied research
and economists have warned that sustained large investments in innovation must be paired with investments in social and environmentalprotection infrastructures.
growth in China's economy is likely to propel it to the top position in absolute R&d spending by the early 2020s.
R&d IN CHINA Summary China has increased its R&d investments by 12%to 20%annually for each of the past 20 years;
As a result, China's investment is now about 61%that of the U s, . and continuing to close.
China's middle class will expand from 35%to 75%over the next 10 years a demographic statistic that reflects economic growth and, to some extent,
China's goal of an innovation-driven economy by 2020 requires solving resources and environmental challenges.
But efficient manufacturing alone is not adequate to maintain economic growth. Recognizing this, China intends to evolve from a manufacturing-centric model in 2013 to an innovation-based economy by 2020.
Mirroring the approach taken by the U s.,Europe and Japan since WORLD WAR II, China is making steady progress at building a research infrastructure 2014 GLOBAL R&d FUNDING FORECAST
China's R&d investment is linked to national goals for industrial growth stable domestic evolution to an advanced economy, power projection and international prestige.
These goals are manifested in large R&d-enabled projects like a Chinese space station and energy generation infrastructure spanning from renewable to nuclear power.
This creates opportunities at a time when new unconventional fossil reserves have decreased emphasis on large-scale deployment of renewable energy technology in the U s. Moreover,
Comparison of annual change in national R&d investment www. rdmag. com December 2013 R&dmagazine 15 must be overcome to reach the 2020 innovation-economy target.
China's continued strong economic growth more than three times that of the U s. provides the resources to support its strong R&d investments
and expansion of basic infrastructure as well The ambitious program and globally enabled economic growth means that China has become an exporter of jobs into Asia to meet its own needs.
Ten years ago, most foreign direct investment was being made in China. Today, China has grown to a point that it is now a foreign direct investor throughout Asia,
the global R&d enterprise was dominated by Europe, the U s. and Japan. In 2011, China surpassed Japan's overall spending.
And by sometime around 2022, it will exceed likely also the R&d investments of the U s. in absolute terms.
In addition to recognizing the strong linkage between R&d and economic growth, it is likely that the professional perspectives of China's leadership are influential in science and innovation policy:
China is expanding its science and technology infrastructure through investments in its academic research institutions, the Chinese Academy of Sciences and its industrial research firms.
In Their Own Words Comment from the Battelle/R&d Magazine Global Researcher Survey The investment that China is making in scientific research
Highlights of the European research enterprise and its economic context include: The amount of R&d performed in Europe is essentially flat for 2012,2013 and 2014.
ending the longest economic contraction on record for the EU The rebound was driven by the EU's largest economy, Germany,
Most European countries are forecast to experience economic growth of about 1%through 2014, although Eastern European countries could see GDP (and related R&d) growth rates in the 1%to 2%range.
including increased access to capital and support for small-to-medium enterprises. A dedicated budget of $34 billion will focus on top-level research supported by the European Research Council, the EU's equivalent to the U s s National Research Council.
While representing less than 5%of the EU's total forecast R&d investment in 2014 of $351 billion
It also emphasizes the translation from scientific research to commercialization to economic impact by helping innovative enterprises develop technological assets into viable products with large commercial potential.
More U s Europe Like the United states, Europe deploys a portion of R&d investment to Asia. 75%87%25%13%Spent in Asia Europe Spent domestically & non-Asia U s. 18 R&dmagazine
. those in Europe and China are expected to see moderate growth in their R&d investments in 2014,
Most Asian countries are projected to experience significant economic growth in 2014. When GDP momentum is paired with national commitments to increase research intensity,
Russia's economy is expected to grow 3, %with R&d growth exceeding that rate. Russia's strong infrastructure for scientific research positions it better than other CIS affiliates,
Among this group are driven innovation economies like South korea (where $63 billion will be invested in R&d in 2014), to significant nations with relatively low emphasis on R&d (e g.
Research Intensity Trends in BRIC and Other Key Nations www. rdmag. com December 2013 R&dmagazine 19 ing a border with the U s. and an economy that is expected to experience reasonable growth in 2014,
while having economies about one tenth the size. In ROW, Means & Policy Disproportionately Affect R&d The sustained high rates of R&d growth in China are unusual.
but social and political priorities draw investment away from R&d. India's projected rate of R&d funding growth in 2014 is only one-fifth that of its anticipated economic growth.
Although difficult to quantify a lack of willingness or capacity to invest in R&d could restrain such economies from reaching larger potential in the long term.
And it may become more difficult. According to Mckinsey Global Institute analysis, as global economic growth slows in the future (as it is projected to do),
the supply of capital will fall short of demand by 2030. This is especially important for those among the 74 ROW economies with limited R&d infrastructures:
They could become even more restricted in building a foundation for R&d in the future than they are now.
In Their Own Words Comment from the Battelle/R&d Magazine Global Researcher Survey The globalization of research, finance, production, etc. will balance world economies in ways not seen ever before to the advancement of some and the stalling or loss
of income of others. Water and climate extremes will likely be key sources of world tension that will need addressing through all means possible including research and technology.
and South korea's rate of R&d investment shows in publication volume and quality. Source: Battelle/R&d Magazine Source:
Thomson Reuters 20 R&dmagazine December 2013 www. rdmag. com 2014 GLOBAL R&d FUNDING FORECAST Maximizing the Economic value of R&d:
The Role of Ecosystems R&d funding is only one ingredient for innovation-based economic success Research and development is a long-term investment in the future,
While there is a significant immediate economic impact from R&d activities (estimated to reach a total impact of 8. 7 million jobs from the full effects of R&d spending across the U s. economy in 2014),
the big payoff from investments in R&d are sustained longer-term economic gains through strengthened global competitiveness and even creation of entire new industries.
R&d investments are the foundation for generating new knowledge through basic research and ultimately for generating products and services through applied research and commercialization.
For this payoff to happen and innovation-driven growth to flourish requires a successful R&d ecosystem.
What it Takes to Build a Successful R&d Ecosystem In successful economies, innovations are fostered and prepared for market within robust,
supportive environments ecosystems that enable risk-taking and catalyze enterprise formation. Well-known examples include the dedicated Research Triangle in North carolina
and the more loosely evolved Silicon valley. More recently, purposeful development of geographically integrated ecosystems has resulted in Russia's Skolkovo, Singapore's Biopolis and the innovation assets of the Qatar Foundation.
One fundamental aspect of these ecosystems is that they are sticky environments in which talent and capital are retained
and recycled into successive phases of innovation and commercial development. Key features of any successful ecosystem regardless of location include LARGE INVESTMENTS IN HUMAN CAPITAL:
Close attention is paid to encouraging and advancing a talent pipeline in science, technology, engineering and math (STEM) skills,
along with broader base of product design, management, sales, finance and entrepreneurs to ensure commercial success. SCIENCE IS PARTNERED WITH COMMERCIAL VISION AND ENTREPRENEURIAL EFFORTS:
CAPITAL AVAILABLE FOR ALL STAGES OF R&d: All levels of funding are encouraged, from small-scale grants for early stage proof-of-concept research to largescale commercially focused equity investment.
GOVERNMENT SUPPORT IS ESTABLISHED & RESPONSIVE: Policies, regulations, incentives and taxes are in place to support the formation and growth of R&d ecosystems.
Industry is offered opportunities to give input on the changing needs of ecosystems. Absence of one or more of the key components substantially hinders an ecosystem's ability to provide returns on investment
and to successfully commercialize innovations. These components are determining factors in the ongoing stability and growth of established ecosystems during recessionary periods and market contractions.
They also are essential measures for the viability and growth of ecosystems in emerging economies.
the demands to keep pace are unrelenting. In a more positive direction, the 2014 survey reflected a sense of improving productivity,
The results from industry executives who track return on investment is one of a generally improving bottom-line impact of research and development activities,
A new factor complicating the R&d environment for the life science industry is the set of changes in the U s. healthcare landscape mandated by the Affordable Care Act.
Smaller biotech companies find opportunity in these circumstances and innovation through acquisition continues to be an important strategy by larger firms.
The future operating environment for this industry is complex. As noted, the Affordable Care Act creates uncertainties in areas like the introduction of new medical products.
we asked U s. industry representatives to provide context on key factors in their R&d investment plans.
Their answers were mixed regarding future R&d investment: 45%were more pessimistic about the sufficiency of their R&d budgets,
and ROI. 64%of life science firms now calculate ROI against research investments a higher level than industry at large, where only 48%attempt these complicated calculations.
Origins & Priorities for Innovation The survey also explored the link between R&d investment and technology development.
Battelle/R&d Magazine, Schonfeld & Associates, European commission-JRC/EIRI Corporate leaders in life science R&d investment 24 R&dmagazine December 2013 www. rdmag. com
INDUSTRY BREAKOUT INFORMATION & COMMUNICATION TECHNOLOGIES Summary The information and communications technologies (ICT) industry, and the significant level of R&d that supports it, is driven by constant change in consumer preferences,
market demand and technological evolution. The ICT industry is the largest private-sector R&d investor in the U s,
software and services that make up the modern information age, spanning semiconductors, telecommunications, productivity or security software, computers, tablets and gaming.
To keep pace with the demand for increased device performance, chip makers continue to invest in technology
Factors Driving R&d Investment While it might be said that Moore's Law is driving the relentless investment in semiconductor R&d
it is consumer demand for functionality driving R&d investments in other sectors of the ICT industry.
Increased competition, at 39%,was the second most cited factor in industry technology change. The constant evolution of ICT technologies is recognized as both a market driver and as a driver for R&d
as the ICT industry's R&d operations are built to support these demand requirements. Nearly three in four industry respondents felt technology change was a decisive factor, with 31%reporting significant technological changes just in the past year.
ICT industry respondents, reflecting steady growth even in weaker economies, are optimistic regarding their 2014 R&d budget.
exceeding US$10 billion in 2012 R&d investment, and Google's and Intel's R&d investments growing by 40%and 27%,respectively, in each of the last two years.
The innovation-and R&dintensive nature of the global ICT industry is evident with all of the U s
%Corporate leaders in ICT R&d investment Nokia Ericsson Canon Huawei Alcatel Lucent Microsoft Intel Cisco IBM Google-10%0%10%20
while capacity, economics and efficiency are drivers for civil aviation requirements. Recent declines in U s. R&d have been the result of reductions in defense R&d
Internal R&d and technological integration in materials, electronics and communication and surveillance technologies within both civilian and defense aerospace, is partially offsetting reduced government funding by creating more efficient, cost-effective capabilities.
instrumentation and communication suppliers, and other firms engaged in defense and homeland securityrelated activities. Firms in this industry typically maintain close R&d ties with the U s. DOD, through collaboration and contract research.
However, ADS firms'internal R&d investments are often 2014 GLOBAL R&d FUNDING FORECAST strongly aligned with the direction and substance of these contract R&d efforts.
and into the future. 69%of our ADS industry respondents believe their 2014 R&d budget is likely to be affected by reduced U s. federal R&d investments.
with more funds and a larger share of investment during major jet liner development. With the combination of reductions in defense spending,
Factors Driving R&d Investment Unlike other industries examined in this forecast, concern over federal budgets and spending is a significant factor in U s. ADS company R&d investment.
Reflecting these concerns 56%of ADS respondents are more pessimistic about their 2014 budgets. Cost cutting and budget reductions in recent years appear to be taking a toll on R&d investment and functions in the industry.
Approximately 40%of the respondents believe their R&d staff budgets are not large enough to accomplish their goals.
growth in commercial aviation and nontraditional defense and homeland security technologies, such as UAVS, will continue to provide momentum in ADS R&d investment.
R&d related to improving the fuel efficiency, operating costs and production of commercial aircraft will continue to benefit from the growing demand for global air travel.
Growth in the deployment of UAVS, primarily (but not exclusively) from increasing military demands, is driving R&d related to structures, materials, electronics and communication and surveillance technologies.
and materials development and advanced materials integration are increasingly important in shaping the industry's R&d investment.
and hence viable economics. Solar is another area where ongoing materials developments for photovoltaic applications (e g.,
R&d Investment R&d activities into new production technologies have led to the ability to access previously unobtainable oil
Within the energy industry, governments can play a significant role in modulating market demand and therefore,
but private early-stage investment has waned. Elsewhere, governments are more active in deployment of alternative energy technology (e g.,
the R&d intensity for most energy leaders is less than 1%.The substantial growth in Petrochina's R&d investment has elevated this firm into the leadership position reaching US$ 2. 3 billion in 2012 with all of the other U s
The forecast for R&d growth in the chemical and advanced materials industry reflects the improving global economy
The forecast for R&d activities within the chemical and advanced materials industry reflects improvements in the U s. and global economy,
and the role this industry plays in support of other demand-driven industries. We forecast U s. chemical and advanced materials R&d to increase by 3. 6%in 2014, reaching $12. 2 billion.
Factors Driving R&d Investment Like most industries resources to fund R&d activities are connected strongly to industry bottom lines.
-recession, investments in industry R&d also have increased. These investments are tied directly to developing new, market-leading chemicals and materials for
which higher margins can be achieved. The factors driving R&d are distinctly different across different types of firms.
and by key customer demand. Lower-cost raw materials have dampened but definitely not eliminated, continued R&d into the use of biomass feedstocks and the production of bioplastics.
as both material substitution and global competition, in what are often commodity products, requires firms to drive production costs to the lowest level possible.
and there is some evidence that support for public R&d investment crosses political boundaries. Even so, the survey results may indicate eroding confidence in the longer-term future.
2 4 3 1 All Respondents 2 4 3 1 Governments'understanding of science & technology issues 38%Sustainable development 32%Demand for renewable
%Competition 14%Translating Research into Products 10%15%Finding New Collaborators 17%Skilled worker Shortages 16%Rankings of Research Impact Metrics Broad Factors Influencing Research
S. Agriculture & Food Prod#2#3 Military Aerospace Energy Technology Information & Communications#4 Commercial Aerospace & Non-Automotive Transport Motor vehicles Composite
Commercial Aerospace & Non-Automotive Transport Military Aerospace Composite/Nano/Advanced Materials Healthcare & Life science Information & Communications Instruments & Electronics#1#2 Energy
Technology Environment & Sustainability#3 Motor vehicles United states Motor vehicles Energy Generation & Eciency Environ . & Sustainability#1#2 Composite/Nano/Advanced Materials#3 Commercial Aerospace & Non-Automotive Transport Healthcare & Life science Instruments & Electronics Germany#4 Information
& Communications Motor vehicles Information & Communications Instruments & Electronics#2#3 Composite/Nano/Advanced Materials Environ
of information related to the global R&d enterprise. Much of the information in this report was derived from these sources.
or output impacts in the economy, the values associated with scientific R&d are smaller than many high-tech industries.
see Sources of U s. Economic growth in a World of Ideas (Jones 2002). ITIF and AAAS have done also important work on this topic.
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