Restoring America’s leadership in innovation-based competitiveness is one of our greatest challenges. President Obama called it “this generation’s Sputnik moment.” But to do so is going to require significant changes to the U.S. innovation system. One way of doing so is reforming how we incentivize the private sector to invest more in the building blocks of innovation, specifically collaborative R&D. Growing sectors of the economy increasingly rely on collaborative research (e.g. research performed between a business and a university, federal lab, or consortium). Businesses are increasingly turning to universities, federal labs, and other external sources for research. For instance, the number of top ranked innovative commercial products borne from in-house private sector R&D declined from 47 percent in 1975 to 13 percent in 2006 and nearly all of the remaining 87 percent of new, innovative U.S. technologies in 2006 were developed by collaborations between businesses and federal labs, federal agencies, universities, and other businesses.

In response, competing countries are increasingly offering additional tax incentives to spur collaborative R&D. For example, Hungary reduces a company’s taxable income by up to 400 percent of the amount invested in collaborating with a university or research institution. Japan and Italy offer flat tax credits for collaborating with a university of research institution of up to 14 percent and 40 percent respectively. And in France firms can receive a 60 percent flat credit on R&D investments at universities and federal labs.

Yet, the R&D tax credit – the principle way government entices the private sector to invest in more R&D – falls short of effectively incentivizing research collaborations. To make the United States more competitive, Congress should make the following changes to the R&D tax credit:

1. Expand the definition of basic research. Congress should eliminate language in the tax code that restricts the definition of basic research to projects “not having a specific commercial objective.”
2. Double the rate for energy research consortia. In order to spur the expansion of more energy research consortia, Congress should boost the flat energy research consortia tax credit from 20 percent to 40 percent.
3. Create a Collaborative R&D Tax Credit. If Congress is serious about making the United States the premier destination for innovation, it should make all collaborations between a business and a university, federal lab, or any research consortia eligible for a 40 percent flat tax credit.

Research and development drives innovation and innovation drives long-run economic growth, creating jobs and improving living standards in the process. University-based research is of particular importance to innovation, as the early-stage research that is typically performed at universities serves to expand the knowledge pool from which the private sector draws ideas and innovation. As such, it is troubling that in 2008 the United States ranked 22nd out of 30 countries in government-funded university research and 21st in business-funded university research. Moreover, we are falling even farther behind.

From 2000 to 2008, the United States ranked 18th in the growth of government-funded university research, with countries like China, Korea and the United Kingdom significantly outperforming the United States. Worse still, the United States ranked 23rd in the growth of business-funded research, with it actually declining as a share of GDP. In contrast, collaboration between universities and business grew dramatically in nations like Austria, China, Israel and Taiwan. These statistics are unmistakable and troubling. As we fail to increase these investments in our future at anywhere near the rate of our economic competitors, our innovation system is faltering. National economies increasingly compete on the basis of innovation, and, in the race for global innovation advantage, the United States will continue to trail countries that have placed university research and industrial collaboration at the forefront of their economic policy.

While our public research universities used to be the envy of the world, 20 years of underfunding by state governments have meant that many public research universities have fallen in their capabilities relative to private research universities. And while our research universities, public and private, are still a key strength, their future is uncertain given the large cuts in state higher education budgets and slow growth in federal support for university research. Of course, there is a remedy. Instead of across-the-board budget cutting at the state and national levels, policymakers can prioritize and target university research for increased funding, with the knowledge that the long-term payoffs to their state and to the nation as a whole will be substantial. Likewise, instead of “reforming” the tax code by “broadening the base” and lowering the rate, policymakers can take a page out of the playbooks of other nations and enact a collaborative R&D tax credit that provides companies with a generous tax credit for expenditures on research conducted at universities.

Rob Atkinson will speak at the American Association for the Advancement of Science's Forum on Science and Technology Policy at the Ronald Reagan Building and International Trade Center in Washington, DC.