While Federal R&D Shrinks, Business R&D is Booming

While cuts to federal research and development (R&D) continue to grab headlines, a quiet but impactful development is emerging: for-profit businesses are ramping up R&D investments.

With roughly 78 percent of R&D conducted in the private sector, the surge in business R&D is a welcome trend. Between 2001 and 2021, U.S. corporate R&D spending increased in real terms from $299 billion to $602 billion, while R&D intensity, defined as R&D investment as a percentage of business output, also saw a marked increase.

This trend is most prominent in California, which has long been recognized as a hub for science and technology. In 2001, California accounted for 23 percent of national business R&D; however, this share climbed to 35 percent as of 2021.

Unsurprisingly, California’s tech sector is the catalyst behind much of the state’s growth. In California, about 20 percent of business R&D goes into information industries like software development and data processing, while more than two-thirds fuels information and communications technologies—computers, phones, satellites, and more—showcasing just how central the tech sector is to the state’s economy.

Alongside California’s tech sector, the importance of the northeastern U.S. pharmaceutical industry to the U.S. innovation landscape cannot be overstated. It accounts for 17 percent of all business R&D nationwide, and in Massachusetts, the nation’s biopharma capital, more than half of total business R&D was conducted in the industry.

R&D is a critical input for innovation and economic growth across the United States. Investments in R&D are closely tied to increases in patent applications, invention licenses, start-ups, exporting, and GDP. Simply put, R&D is one of the most powerful economic tools available for policymakers and business leaders.

But just because things are good doesn’t mean they can’t get better. Studies (and history) have shown that businesses will often underinvest in R&D, unless they are given incentives to invest more. Policymakers must encourage more R&D from the private sector, and doubling the national R&D tax credit from 20 percent to 40 percent would be a great start.