Introduction

The Importance of University Research

Benchmarking U.S. Government Funding

Benchmarking U.S. Business Funding of University Research

Conclusion

Endnotes

Introduction

In 2013, ITIF found that America was no longer the lead nation in terms of funding university research—nowhere near it, in fact—despite having world-leading research universities that have been key to driving American technological supremacy since World War II.[1] According to the latest data available at that time, the United States ranked 24th out of 39 nations in government funding of university research as a share of gross domestic product (GDP). Since then, according to data provided by the Organization for Economic Cooperation and Development (OECD), the United States remained in 24th place out of 36 nations, with the nine governments investing more than double the U.S. level. In addition, in terms of change, U.S. funding as a share of GDP fell by 0.06 percentage points. The only nations in the sample with larger declines were Lithuania, Estonia, Singapore and Ireland.

The United States would need to invest an additional $17 billion per year to get to 15th place in government funding of university research; $31 billion per year to get to 10th place; $51 billion to get to 5th place; or $90 billion to match Norway in 1st place.

Indeed, many nations are increasing investments in university research precisely because they

in the race for global innovation advantage, it will need to reverse these trends and significantly increase university research funding, while at the same time providing stronger incentives for businesses to invest in university research, including a more generous R&D tax credit. Fortunately, the Biden administration and Congress have proposed remedying this, in part through the President’s infrastructure plan and the Congressional Endless Frontier Act. But proposals don’t necessarily mean authorization and authorizations don’t necessarily mean appropriations. Appropriating significant funds, including for university research, will show the rest of the world that the United States is serious about once again being the innovation leader.

The Importance of University Research

In developed, knowledge-based economies, innovation powers long-run economic growth. For example, a study published by the U.K. National Endowment for Science, Technology and the Arts found that two-thirds of U.K. private-sector productivity growth between 2000 and 2007 was a result of innovation.[2] In a cross-country study, Klenow and Rodríguez-Clare found that more than 90 percent of the variation in the growth of income per worker was a result of innovations that changed how capital was used.[3] Likewise, Hall and Jones studied 127 nations and found that how capital was used was 4.6 times more important in driving economic growth than how much capital a nation had.[4]

Universities have taken on an even greater role in the American innovation system as many corporations have shut down or repurposed central research laboratories that used to conduct R&D.

Innovation is also positively correlated to job growth in the mid to long term.[5] Innovation leads to job growth in three fundamental ways. First, it gives a nation’s firms a first-mover advantage in new products and services, expanding exports and creating expansionary employment effects. In the United States, for example, growth in exports leads to twice as many jobs as an equivalent expansion of sales domestically.[6] Second, innovation’s expansionary effects lead to a virtuous cycle of expanding employment. In the early to mid-1990s, increasing usage of information technology drove broad-based economic growth, creating hundreds of thousands of new jobs, which, in turn, led to additional job growth in supporting industries. Finally, when innovation leads to higher productivity, it also leads to increased wages and lower prices, both of which expand domestic economic activity and create jobs.[7]

Research performed outside the private sector is essential to the U.S. innovation system. Even with robust corporate R&D investment, the private sector alone does not invest at the levels society needs, in large part because firms do not capture all the benefits of innovation. Numerous studies suggest the rate of return society receives from corporate R&D and innovation activities is at least twice the estimated returns companies themselves receive.[8] For example, Tewksbury, Crandall, and Crane examined the rate of return of 20 prominent innovations and found a median private rate of 27 percent. However, the median social rate of return was a whopping 99 percent—almost four times higher.[9] Nordhaus estimated that inventors capture just 4 percent of the total social gains from their innovations; the rest spill over to other companies and society as a whole.[10] This differential between private and social returns means the optimal level of R&D investment for society—that which achieves the highest rate of economic growth—cannot be met by the private sector alone. Thus, without public investment, the rates of economic growth, job creation, and living-standard improvement are all lower than their potential. The university system plays a key role in filling the gap between the current levels of private R&D and that which is optimal for economic growth.

Overall, university research has large, beneficial impacts on U.S. economic growth. Mansfield found, in terms of its impact on product and process development in U.S. firms, the social rate of return from investment in academic research is at least 40 percent.[11] A study by the Science Coalition found that “companies spun out of research universities have a far greater success rate than other companies.”[12] And a study by the Ratio Institute of Stockholm found that public university research spin-off companies have more patent applications and radical product innovations than similar non-spin-off firms—the study’s authors find that these superior results can be explained by both research cooperation between the companies and universities, and colocation factors.[13] Indeed, university research has given the United States breakthrough companies such as Google, Medtronic, and iRobot.[14]

The shift to shorter-term, less-fundamental R&D risks shrinking the knowledge pool from which firms draw the ideas and information necessary to conduct later-stage R&D and bring innovations to market.

Despite the importance of this new, more synergistic relationship between research universities and innovation-based enterprises in the United States, some argue that government support for R&D does not really matter, and companies will pick up any slack from cuts in federal R&D. But, as previously noted, the exact opposite appears to be true, as U.S. companies have shifted funding away from basic and applied research. Moreover, publicly funded research is a complement to and not a substitute for private-sector research. A study by the RAND Corporation found that, in general, 1 additional dollar of public contract research added to the stock of government R&D induces an additional 27 cents in private R&D investment.[15] A Carnegie Mellon University study found that “public research is critical to industrial R&D in a small number of industries and importantly affects industrial R&D across much of the manufacturing sector.”[16]

The development and expansion of major U.S. research universities, including the public land grant universities and other state universities, has played a key role in driving U.S. global innovation leadership. Indeed, it has become almost a matter of faith in economic and innovation policy circles to point to U.S. research universities as the secret weapon in the U.S. economic competitiveness arsenal. However, as the next section demonstrates, this widely held view reflects the past rather than the present.

Benchmarking U.S. Government Funding

We examined 2018 OECD data on university R&D spending by sector of performance and funding source, as this was the latest year in which the United States was comparable with other OECD countries. As of 2018, governments in the United States (state and federal) collectively invested 0.20 percent of GDP on university research, ranking 24th out of 36 nations.[17] For example, figure 1 shows the Norwegian government invests over 3.1 times as much (0.64 percent) on funding university research as the United States, with Australia just behind (0.56 percent). Germany (0.45 percent), France (0.35 percent), and the United Kingdom (0.26 percent) all out-invest the United States. U.S. governments fund at levels closer to East Asian countries: Although South Korea (0.29 percent) and Taiwan (0.24 percent) out-invest the United States, the United States slightly out-invests Japan (0.20 percent) and invests at almost double the rate of China (0.11 percent), although Chinese funding is increasing. The exception to lower East Asian investment levels is Singapore, which invests 0.43 percent of GDP. In all, nine countries fund at more than 200 percent of U.S. levels, while 13 fund at more than 150 percent.

Figure 1: Government funding for university R&D as a share of GDP, 2018[18]