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From a conceptual point of view, the economics of research and development is the opposite of pollution. When a private party carries out an economic activity that leads to pollution, the private party gets the economic benefit, but the broader society bears the costs (in the jargon, a “negative externality”). However, when a private party carries out research and development, the private part benefits to some extent, but the additional benefits of the new knowledge spill over to the rest of the economy (a “positive externality”). Thus, it makes sense to have public policies that discourage pollution, but that encourage research and development.

I’ve long and frequently argued for a substantial increase in US R&D spending (for example, here, here, here, and here), so it seems appropriate to note that there has been a substantial increase in the last decade, driven by US business spending on R&D. Here are some graphs showing overall patterns of US R&D spending from “Trends in U.S. R&D Performance” (National Science Foundation, May 2024).

For a long time, I told the story of US R&D funding in this way: There was a big run-up in US R&D spending in the 1950s and into the 1960s, driven largely by US government R&D spending typically aimed at military and space programs. However, federal R&D spending as a share of GDP began to sag after the 1960s, while business R&D spending as a share of GDP increased.

These two forces more-or-less counterbalanced each other for several decades, so that total R&D spending as a share of GDP (blue line) hovered between about 2.3%-2.7% of GDP from the early 1980s up through about 2013. But then you see a substantial change. Although federal support for R&D as a share of GDP continues to lag, business spending on R&D takes off, and pushes US R&D spending up to about 3.5% of GDP. With a US GDP in 2024 at around $29 trillion, a 1% rise in GDP means that about $290 billion more is being spent on R&D this year than would have been spent if R&D had stayed in that lower range.

The same pattern emerges if you look at dollar amounts of R&D spending. The lines here are not adjusted for inflation, or for economic growth, so the picture is in some ways a little misleading. But you can see that government and industry R&D spending were similar in size as recently as the second half of the 1980s. Since then, the rise in US R&D spending has been driven by business R&D spending–especially in the last decade or so.

This figure shows the share of R&D funding coming from different sources. As you can see, the share of R&D coming from business spending has risen sharply, and is now approaching 80%.

This figure offers an international comparison. The blue bars show national R&D spending in absolute levels (measured on the left-hand axis): thus, the big economies like the United States, the EU-27 taken as a whole, and China have the biggest bars. The red diamonds show national R&D spending as a share of GDP (measured on the right-hand axis). As you can see, a couple of smaller economies, South Korea and Taiwan, spend more as a share of GDP than the United States. But in general, the US has both the highest level of absolute R&D spending and also–thanks the recent run-up in R&D spending by business–one of the highest levels of R&D spending as a share of GDP. To me, the gap between the US and the EU-27 economies in R&D spending is especially striking.

Finally, one concern sometimes expresses is that when it comes to R&D, business-funded spending can be more focused on the “D” of developing products for near-term sales in the market, and less on the “basic” research that can be so important for longer-term progress. On this point, here’s a figure from the “Analysis of Federal Funding for Research and Development in 2022: Basic Research” (National Science Foundation, August 15, 2024).

As the figure shows, government used to dominate funding for basic research, accounting for 70% of the total in the 1960s and 1970s, and for 60% of the total as recently as the early 2000s. But the rise in overall US business R&D spending has “basic” research spending by business as well. Now, it looks as if basic R&D spending by business is about to exceed that from the federal government.

One of the recent puzzles of the global economy is that the US economy seems to just keep growing, albeit at a moderate rate, while many other high-income economies like those in Europe, as well as Japan and Canada, seem stuck in slower growth patterns. My guess is that the surge in US R&D spending is part of the explanation for that pattern. Moreover, a higher level of R&D spending by business suggests that US firms are seeing opportunities to capitalize on their R&D efforts in the ever-changing and evolving US economy, while many European firms may not be seeing the same willingness and opportunity for change within their national markets.

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