content
entry. 1
R&D spending trends 1
Manufacturing industries 4
Advanced manufacturing industries 6
Non-manufacturing industries 7
RECOMMENDATIONS 8
Business research and development (R&D) spending is key to the innovation economy. As such, the fact that domestic business spending on R&D increased 15 percent from 2021 to 2022 should be good news. But not so fast. Growth in business research and development spending from 2018 to 2022 was quite uneven, with non-manufacturing industries growing much more than manufacturing industries. This means that manufacturing industries are increasing their R&D much more slowly, including the advanced industries that the United States relies on for global competitiveness. For the United States to successfully compete with China, most industries must be strong in innovation, which requires robust growth in R&D. As such, Congress should pass pro-innovation tax reforms, including full deductibility of R&D spending and doubling of the R&D credit.
The National Science Foundation (NSF) recently released its 2022 Business Enterprise R&D Survey, which shows that US businesses spent $653.5 billion on R&D in 2022, an increase of 55 percent (in nominal dollars ) of 2018 expenditures of $420.5 billion. (See Figure 1.) However, when controlling for GDP growth, business research and development spending grew only 30 percent faster than GDP.
Figure 1: Domestic R&D Expenditures ($ Millions) for Manufacturing and Non-Manufacturing Industries
This overall growth masks important differences between manufacturing and non-manufacturing R&D growth. Manufacturing R&D grew just 8 percent from 2018 to 2022 when controlling for nominal GDP growth. In contrast, non-manufacturing R&D grew nine times faster (70 percent). (See Figure 2.)
Figure 2: Growth in R&D spending (controlled for GDP growth) from 2018 to 2022
In 2018, manufacturing accounted for 65 percent of U.S. business R&D, and non-manufacturing industries accounted for 35 percent. Over the next four years, the non-manufacturing sector accounted for 60 percent of the growth in R&D, 73 percent more than their share would have predicted. By contrast, manufacturing accounted for 40 percent of the increase, 40 percent less than their share would have predicted. As a result, the share of manufacturing industries in R&D spending fell to 56 percent, while the share of non-manufacturing industries increased to 44 percent. (See Figure 3.)
Figure 3: Share of Research and Development of manufacturing and non-manufacturing industries in 2018 and 2022
This discouraging outlook becomes even worse when removing the excess contribution to growth from the few industries that increased the total R&D share of manufacturing industries in 2022. Indeed, only 4 of the 32 manufacturing industries (with available data) contributed to a larger share in R&D growth than their 2018 share would have predicted, increasing the R&D share for the year 2022. (See Table 1.) For example, the semiconductor and other electronic components industry accounted for 8 percent of the growth in business R&D spending, 16 percent more than their share would have predicted in 2018. Without the excess contribution of this industry to growth, R&D spending of all manufacturing industries would have been 0.4 percentage points lower in 2022.
Collectively, these 4 industries accounted for 1 percentage point increase in R&D spending. Alternatively, consider the medical equipment and supplies industry, which accounted for 2.6 percent of growth, 29 percent lower than its share would have predicted in 2018. Without its modest contribution to growth, spending on Manufacturing Research and Development would have been 0.4 percentage points higher. The 29 industries under contribution collectively led to a 9 percentage point decline in the share of R&D over this period.
Table 1: Share of Research and Development of manufacturing industries in 2018 and contribution to R&D growth from 2018 to 2022
|
Industry (All NAICS) |
R&D allocation in 2018 |
Part of the Change in Research and Development |
|
Guided rocket, spacecraft and similar parts |
0.1% |
1.8% |
|
Military armored vehicles, tanks and tank components |
0.0% |
0.0% |
|
Semiconductors and other electronic components |
6.9% |
8.0% |
|
Electrical equipment, devices and components |
1.0% |
1.0% |
|
Food |
1.1% |
1.0% |
|
Semiconductor machinery |
0.9% |
0.8% |
|
Fabricated metal products |
0.5% |
0.4% |
|
Medical equipment and supplies |
3.6% |
2.6% |
|
Pharmaceuticals and medicines |
22.8% |
15.9% |
|
Vehicles, bodies, trailers and parts |
6.1% |
3.9% |
|
Other machinery |
1.5% |
0.8% |
|
Primary metals |
0.2% |
0.1% |
|
Wood products |
0.1% |
0.0% |
|
Electromedical, electrotherapeutic and radiation devices |
0.7% |
0.4% |
|
Plastic and rubber products |
0.7% |
0.2% |
|
Other transports |
0.4% |
0.1% |
|
Basic chemicals |
0.6% |
0.2% |
|
Agricultural implementation |
0.5% |
0.1% |
|
Engine, turbine and power transmission equipment |
0.6% |
0.2% |
|
Various other productions |
0.6% |
0.1% |
|
Paper |
0.2% |
0.0% |
|
Non-metallic mineral products |
0.3% |
0.0% |
|
Soap, cleaning compositions and toilet preparations |
0.7% |
0.1% |
|
Furniture and related products |
0.1% |
0.0% |
|
Communication equipment |
3.0% |
-0.2% |
|
Resin, synthetic rubber and artificial synthetic fibers and yarns |
0.4% |
-0.1% |
|
Aircraft, aircraft engine and aircraft parts |
2.7% |
-0.8% |
|
Oil and coal products |
0.4% |
-0.2% |
|
Printing and similar support activities |
0.1% |
0.0% |
|
Beverages and tobacco products |
0.3% |
-0.2% |
|
Textiles, clothing and leather products |
0.2% |
-0.2% |
|
Search, reconnaissance, navigation, guidance, aeronautical and marine system and instruments |
0.8% |
-0.6% |
Due to the decline in the share of R&D in manufacturing industries, the R&D investments of many advanced industries are not keeping up with the overall average growth rate (55 percent) and contributing their fair share. This is because many advanced industries tend to be manufacturing ones. Indeed, 13 ITIF-defined advanced industries fall under manufacturing in the NSF data set. As such, their share of R&D spending in 2022 also fell. Of the 13 advanced manufacturing industries, only 4 contributed more than their 2018 share would have predicted. (See Figure 4.) The other nine did not. For example, the growth rate of the auto, wagon, trailer and parts industry was below average at 35 percent, while its contribution to growth was 37 percent less than the projected share of 2018. As such, the share of of R&D fell from 6.1 percent in 2018 to 5.3 percent in 2022. This is particularly problematic because innovation is crucial for these industries to remain competitive and keep their share of the global market from losing another nation. As ITIF explains, “Once lost, a firm’s or a nation’s technological advantage is almost impossible to regain.”
Figure 4: Change of advanced manufacturing industries in R&D share from 2018 to 2022
Furthermore, growth in non-manufacturing industry is also quite concentrated, with about 78 percent coming from just 4 industries: e-transportation and e-auctions, data processing, hosting and related services (eg, providers cloud computing), software publishers and other information (eg Internet companies). (See Figure 5.) These NSF data highlight the importance of “looking under the hood” and not just at the top numbers. While the latter seems very impressive, 40 percent of the faster growth than overall R&D is almost exclusively due to the information technology sector.
Figure 5: Share of growth in non-manufacturing R&D by industry
Two main conclusions should emerge from these data. The first is that IT non-manufacturing industries are powering US R&D growth. As such, current efforts to stifle these sectors through antitrust regulations, for example, constitute a national suicide pact. The second is that the positive top-line figures hide real weaknesses in US manufacturing innovation and, ultimately, competitiveness. Chinese industrial R&D does not stand still. In fact, it grew about 70 percent from 2018 to 2023.
Congress should pass pro-innovation tax reforms that will encourage firms in all industries, but especially those in manufacturing, to increase their investments in Research and Development. Policymakers should start by restoring full R&D spending, as this will reduce the after-tax cost of R&D investment and encourage businesses to invest more money in research and development. Additionally, Congress should double the R&D tax credit from 20 to 40 percent for the regular credit and from 14 to 28 percent for the alternative simplified credit.
