www.rdmag.com R&D Magazine–January 2004 F1

Strong Federal R&D HelpsModest Industrial Increases

R&D Funding ForecastR&D Funding Forecast

www.battelle.org

n Overall growth in U.S. R&D spending isexpected to increase to $291 billion in2004, a 2.5% increase over that spent in 2003.

n Record Federal R&D increases will pushspending to government R&D to $89billion, a 4.8% increase from 2003.

n Industrial R&D spending will increase0.8% to $181 billion, basically flat for thepast four years.

n Defense and Homeland Security will be the main drivers for growth ingovernment, industry, and academic/non-profit R&D.

The last quarter of 2003 saw renewed U.S.economic growth that reinforced analysts’projections of 2004 being one of the best, ifnot the best, years in terms of economicgrowth in the past 20 years. According to

the New York City-based The Conference Board, realGDP (gross domestic product) is expected to increaseto 5.7% this year, following 2.4% growth in 2002, anda likely 4% in 2003. And while many analysts wouldlike to believe that R&D spending is more directlylinked to long-term economic trends than short-term

fluctuations, the effects of a strong economic reces-sion, like the one we have just experienced, has takenits toll on R&D spending. Indeed, industrial R&Dspending (in constant-1996 U.S. dollars) has declinedfor the past three consecutive years (2001-2003),according to data collected by the National ScienceFoundation (NSF). Industrial R&D spending droppedso dramatically in 2002 (-4.5%) that it caused total U.S.R&D to also drop slightly (0.3%, in constant 1996 dol-lars) for the first time since the 1993 U.S. recession.

The saving grace of the recent industrial perturbationshas been continued strong federal R&Dfunding support, following periods ofweak and sometimes even decliningfederal spending in the late 1990s.

It is within this framework, that ana-lysts from Battelle, Columbus, Ohio,and the editors of R&D Magazine fore-cast that combined U.S. industrial, fed-eral, academic, and non-profit R&Dspending for 2004 will exceed $290.8billion, up 2.5% from the $283.8 bil-lion spent in 2003. Industrial spendingon R&D is expected to see compara-tively small growth to that of govern-ment and academic/non-profit spending.Overall, current dollar industrial spend-ing is forecast to increase to $181.1 bil-lion, up from $179.6 billion in 2003, anincrease that will not match the expect-ed inflation rate.

Industry and jobsFor industrial R&D, the economy willcontinue to be an overriding concernthroughout 2004. Much of the indus-trial R&D funding effects revolvearound employment, since salariesaccount for nearly half of the overallR&D budget. While high-tech layoffsin 2003 were less than half of whatthey were in 2002, there were still

www.rdmag.com R&D Magazine–January 2004 F3

Upturns and DefenseDrive R&D in 2004

Renewed economic growth, albeit slow for industrial R&D, and strong federal

funding for defense R&D will be the primary drivers for improved U.S. R&D

spending and performance in 2004.

R&D Funding ForecastR&D Funding Forecast

Future Industrial R&D Funding Trends Uncertain(R&D budgets, billions of U.S. dollars)

Company 2002 2003 2004 Change

1 Ford Motor 7.70 7.77 7.86 1.1%

2 General Motors 5.80 5.51 5.18 -5.9%

3 Pfizer 5.18 6.10 6.78 11.2%

4 IBM 4.75 4.66 4.56 -2.2%

5 Microsoft 4.74 5.19 5.64 8.7%

6 Johnson & Johnson 4.15 4.69 5.23 11.5%

7 Hewlett Packard 4.10 4.54 4.98 9.7%

8 Intel 4.05 4.03 3.96 -1.7%

9 Cisco 3.99 4.16 4.32 3.8%

10 Motorola 3.77 2.98 2.22 -25.5%

11 Merck & Co. 2.68 2.86 3.04 6.3%

12 Bristol-Myers Squibb 2.39 2.64 2.72 3.0%

13 Lucent Technologies 2.34 1.45 0.56 -61.4%

14 Eli Lilly & Co. 2.23 2.47 2.59 4.9%

15 General Electric 2.22 2.38 2.56 7.6%

Source: Schonfeld & Assoc., R&D Magazine, company documents

Industrial R&D spending for 2004 will be a mixed bag of increases anddecreases as firms return to profitability and reevaluate their long-termstrategies.

more than 150,000 lost jobs in 2003, according toChallenger, Gray & Christmas, Inc., a Chicago-basedoutplacement firm.

While overall unemployment rates stabilized dur-ing the last part of 2003—Monster.com job postings

rose 11% in Sept. 2003—most largecompanies are still hesitant to hire untilthey absolutely have to. Companies,such as IBM and Microsoft, however,have stated that they will hire a signifi-cant number of new employees in 2004.Some analysts question the validity ofsome of these statements regarding theU.S. employment picture, since someof the hiring claimed will likely go tooffshore operations.

Confusing the issue is the continuingimprovement in worker productivity,despite the lean research staffs that arenow prevalent at most organizations.

According to The Conference Board,worker productivity rose 4.3% in 2003,and is forecast to rise another 3.6% in2004. The Conference Board also fore-casts the U.S. to generate more than a mil-lion new jobs this year, lowering theunemployment rate to about 5.6%by May2004, from its 5.9% rate in Nov. 2003.The potential hiring numbers for 2004,however, only slightly offset the jobs thatwere lost during this past recession.

Federal fundsFor government-funded R&D, the House of Represen-tatives ended their 1st Session of the 108th Congressin mid-December 2003 by approving an omnibusappropriations bill (HR 2673) that bundles sevenFY2004 unfinished R&D appropriations bills with thesix bills already signed into law. The Senate did nothave time to vote on the bill and will take it up whenthe 2nd Session of the 108th Congress reconvenes onJan. 20, 2004.

The 1,185-page omnibus bill combines $328 bil-lion in federal discretionary FY2004 spending and isdesigned so that the total spending fits under congres-sional budget targets. The bill allows record-breakingspending for defense and homeland security R&D,while only allowing modest increases for non-defenseR&D programs. If approved, the omnibus appropria-tions bill actually requires across the board 0.59%funding reductions on all non-defense appropriations,including those already fully approved, like that of theDept. of Homeland Security (DHS).

The Senate is expected to approve the bill with fewchanges when it reconvenes and then forward it toPresident Bush for signing by early-February.

Growth driversIn the mid- to late-1990s, the drivers for R&D growthwere pharmaceutical, software, telecommunications,and semiconductor technologies. Due to a variety of

F4 R&D Magazine–January 2004 www.rdmag.com

R&D Funding ForecastR&D Funding Forecast

About 60% of R&D Magazine's survey respondents said their R&Dbudgets would not change in 2004, while nearly a third said theyplan increases.

Battelle and R&D Magazine forecast that nearly $291 billion will be spent on R&D in 2004,a 2.48% increase over that spent by industry, academia, and government in 2003.

2004 R&D Funding Forecast(millions of current U.S. dollars)

Performer Federal Private Other non-Source government industry Academia profit Total

Federal government 26,090 20,140 33,970 9,170 89,370

Private industry 177,960 2,100 1,080 181,140

Academia 11,380 11,380

Other non-profit 3,290 5,650 8,940

Total 26,090 198,100 50,740 15,900 290,830

2004/2003 R&D ChangesPerformer Federal Private Other non-Source government industry Academia profit Total

Federal government 4.53% 2.25% 6.42% 5.35% 4.80%

Private industry 0.88% -1.13% 0.46% 0.85%

Other non-profit 10.25% 7.38% 8.42%

Academia 6.79% 6.81%

Total 4.53% 1.01% 6.41% 5.74% 2.48%

www.rdmag.com R&D Magazine–January 2004 F5

For U.S. industrial R&D, the past three years have been a test ofcourage to maintain long-term growth with continued R&D invest-ments, maintain profitability in the face of the recession-induceddeclining sales, and rationalize across-the-board personnel reductions.

In terms of real, inflation-adjusted dollars, U.S. industrial companies cut theirR&D spending in 2001 by 1.7%, in 2002 by 4.5%, and in 2003 by 0.7%. In2004, we forecast that this declining trend will continue as R&D budgets fallby about 0.5% in real dollars—increasing in current dollars by 0.8%.

Part of this reduced R&D funding can be attributed directly to the reducedtotal salary costs—the largest single R&D cost—of the smaller R&D staffsafter years of headcount reductions. Few industries were immune to the reces-sion’s effects; even increases in the life science sector failed to offset substantialdecreases in R&D spending in the manufacturing and electronics industries.

Over the years, pharmaceutical R&D was buoyed by a flow of block-buster drugs and the promise of new drugs that would come to market inaccelerated time cycles due to the implementation of new drug discoveryand development technologies. In the past two years, it has become appar-ent that new blockbuster drugs are not being brought to market at the ratejustified by the increased R&D spending and the development cycles havealso not been substantially improved beyond the traditional 10 to 12 years.While most large pharmaceutical companies are not in any immediatefinancial danger, they have slowed or stopped the rate of their increases.Our 2003 R&D funding forecast stated that the average pharmaceuticalcompany’s R&D increase was more than 13%, a number consistently heldto for the past 10 years. For 2004, that average drops to 8.3%.

Similarly, most biotech companies, except for market leaders Amgen andGenentech, continue to slash their R&D budgets and cut staffs and programsas they struggle to survive in light of reduced investor confidence of short-termproduct introductions. Amgen’s and Genentech’s dominance and successesactually bias the overall trend for this industry. On the positive life science side,medical and diagnostic firms continue to have moderate successes and contin-ue aggressive double-digit R&D spending.

Outside of the life science arena, the renewed economic envi-ronment should allow some industries like semiconductor, soft-ware, and aerospace to make moderate R&D funding improve-ments in 2004. Overall semiconductor revenues should increaseby more than 25% in 2004, according to In-Stat/MDR, Scotts-dale, Ariz., their largest increase since the oversupply situationof 2000 that sent this industry into a tailspin for three years.With improving revenues, and an overall business communitythat is likely to increase capital spending for more electronicinfrastructure improvements, the semiconductor and computerindustries are poised for a positive funding outlook. In-Stat/MDR does predict a 10.6% decline in semiconductor sales in2006, but this would be followed by a 12.9% increase in 2007.

Even the telecommunications industry, one of the first indus-tries to experience a slowdown due to a dramatic oversupplyand overcapacity situation, appears to have “bottomed out.”Lucent Technologies, Murray Hill, N.J., recorded its first prof-itable quarter in late-2003 since March 2000.

The automotive industry, one of the few industries to experi-ence neither a major sales slowdown nor significant cutbacksover the past few years due to liberal financial incentives is fore-cast to have a moderate improvement in R&D funding in 2004.Overall, the long-term cost of the financial incentives and a hugeoversupply situation makes for a challenging future for this

industry. Much of how the U.S. automakers meet this challenge will dependupon how successful they are at tapping the growing consumer market inChina/Asia and in developing successful new products.

A substantial amount of R&D funding provided by the U.S. government,and the investment community is available to support emerging technolo-gies, such as those in nanotechnology and computer-based technology. Butthe relative size of the developments are still very small and will take a num-ber of years to grow to a significant market opportunity. Analysts, includingthe National Science Foundation, estimate that worldwide nanotech rev-enues could grow to a trillion dollars in 10 years.

Big Pharma Struggling R&D Spending (billions of U.S. dollars)

2002 2003 2004

1 Pfizer 7.58 7.09 6.78

2 Glaxo SmithKline 4.29 4.15 4.01

3 Johnson & Johnson 3.96 4.36 4.76

4 Aventis 3.59 3.60 3.61

5 AstraZeneca 3.06 3.24 3.41

6 Novartis 2.80 2.90 2.99

7 Merck & Co. 2.68 3.05 3.04

8 Roche 2.42 2.53 2.64

9 Bristol-Myers Squibb 2.22 2.19 2.20

10 Eli Lilly 2.15 2.26 2.37

Source: Company documents, R&D Magazine

Industrial R&D SpendingR&D Spending R&D Growth

(billions of U.S. dollars) (Percent)2003 2004

Aerospace 8.88 9.20 3.6

Biotech 6.97 8.11 16.4

Chemicals 5.31 5.39 1.5

Computer / Office Equipment 8.60 8.35 -2.9

Electrical Equipment 11.02 10.16 -7.8

Electronic Computers 5.34 5.16 -3.4

Motor Vehicles 44.81 46.29 3.3

Petroleum Refining 5.00 5.32 6.4

Pharmaceutical 55.04 59.61 8.3

Software 20.82 22.33 7.2

Radio/TV Equipment 12.80 11.29 -11.8

Semiconductor 15.42 5.46 0.3

Telecom Apparatus 23.33 22.79 -2.3

Source: Schonfeld & Assoc., R&D Magazine

Industrial R&D Balances Profits and Growth

factors (economy, over-pro-duction, outsourcing strate-gies, and others), thesetechnologies, while stilldemanding large amounts ofresearch spending, haveR&D growth that is nega-tive, flat, or disguised in theform of foreign outsourcing.

In the first half of thefirst decade of the 21st cen-tury, R&D growth driversnow focus on nanotechnol-ogy, biotechnology, andsupporting defense andhomeland security in thecontinuing aftermath of theSept. 11, 2001 terroristattacks on New York andWashington, D.C. Even inthe biotechnology arena,however, much of the newgrowth is often focused on

the support of bioterrorism applications. Overall, thenumber of public biotech companies dropped by morethan 13% from 2000 to 2002, according to San Fran-cisco-based Burrill & Co.

Major 2004 R&D predictions:n Defense and homeland security will be the

major drivers in increas-ing federal R&D spend-ing to $89.4 billion inFY2004, an increase of 4.8% over FY2003spending.

n Industrial spendingis expected to increase tomore than $181 billion in2004, a level that in infla-tion-adjusted values isslightly less than thatspent by industrial sourcesin 2003, the fourth con-secutive year of decreasesin the industrial sector.

n The remaining R&Dspending will be suppliedby academia and non-profit organizations—more than $20.3 billion, a7.4% increase over whatwas provided by theseorganizations in 2003.

n Industrial sourcesprovide more than twice

the R&D funds provided by federal governmentsources, but the industrial share is declining by about1% per year.

n Industrial support of R&D contains an increasingtrend to outsource R&D programs and activities to othercompanies, organizations, and off-shore facilities.

n The globalization of industry and technologyhas complicated the task of tracking regional R&Dactivities.

n A negative balance of trade position in the U.S.and the shifting of its manufacturing base to foreignsuppliers continues to weaken U.S. industries’ abilityto support a strong R&D base.

n For the second year in a row, the support of fed-eral R&D has been affected by delays in the overallapproval process that has gone four months beyond thebeginning of the fiscal year. With 2004 being a majorelection year, the FY2005 budgetary process is expect-ed to see similar or possibly even longer delays.

n The effects of Sept. 11, 2001 continue to have amajor influence in the character of current federalR&D. Unforeseen terrorist acts that are similar or larg-er in scale would have an equally dramatic effect onfuture federal R&D.

The budgeting of industrial R&D has substantiallychanged from the way R&D managers did it five to tenyears ago. In the past, annual R&D budgets wereestablished at the beginning of the fiscal year and gen-erally adhered to during the course of the year. Now,because of the uncertainty of the economic environ-ment even six months down the road, managers can nolonger afford that risk. R&D budget targets are stillmade, but those targets can change upward or down-ward during the year.

According to a recent R&D Magazine reader sur-vey, slightly more than 20% of the R&D managerssurvey adjusted their R&D budgets down by an aver-age of 21% during 2003. About 14% of those surveyedmanagers increased their R&D budgets during 2003by about the same value. Slightly less than two-thirds

F6 R&D Magazine–January 2004 www.rdmag.com

R&D Funding ForecastR&D Funding Forecast

Research Continues Strong Growth(R&D spending in billions of U.S. dollars)

Basic Appliedresearch research Development Total

2001 47.1 64.4 162.7 274.2

2002 50.8 65.6 160.1 276.5

2003 54.1 67.8 161.9 283.8

2004 57.7 69.6 163.5 290.8

Source: NSF, R&D MagazineFew industrial and academic R&Dorganizations plan on cutting theirstaffs in 2004, while a significant number plan on hiring to increasetheir R&D staffs.

More incremental R&D spending will be targeted atresearch, rather than development areas—a dramaticchange from previous spending trends.

More than a third of survey respondentschanged their 2003 R&D budgets duringthe year, with more of them decreasing itthan increasing it.

www.rdmag.com R&D Magazine–January 2004 F7

Government R&D has continued a rebound begun in FY2001, reach-ing a record-setting $127 billion (total R&D including facilities andequipment) in FY2004. The federal R&D budget approval this yearwas part of an omnibus appropriations bill that was approved by

the House of Representatives just before the December holiday adjournmentand will likely be signed into law with few changes by early-February 2004.

Nearly three-quarters of the federal R&D budget is dedicated to justtwo agencies—the Dept. of Defense (DOD) and the National Institutes ofHealth (NIH).

Within the omnibus appropriations bill agreement, the FY2004 NIH R&Dbudget has been increased 3.2% to $27.1 billion. After five years of roughly15% annual increases that doubled its budget size (from $13.1 billion inFY98 to $26.4 billion in FY03), the 3.2% increase is considerably smallerthan previous years, but still nearly three times the size of the administra-tion’s original R&D budget request. After doubling its budget, NIH directorElias Zerhouni established a new set of initiatives that he termed would“turbo-charge development at the NIH.” His NIH Roadmap for MedicalResearch, established at the beginning of FY2004, will have $2.1 billion infunding over the next five years to support 28 initiatives under three mainthemes: New Pathways to Discovery, Research Teams of the Future, and Re-Engineering the Clinical Research Enterprise. It also supports enhance-ment of research collaborations within large pharmaceutical companies.

The largest government R&D increase for FY2004 went to the DOD, a13.0% increase, or $7.6 billion, to a record high $66.3 billion. This was $3.5billion or 5% more than the administration’s original FY2004 DOD R&Drequest of $61.8 billion. These increases offset the decline in R&D spendingin the early- to mid-1990s following the end of the Cold War, when DODR&D was cut by a third following a peak in FY1987. DOD R&D funding nowexceeds that spent during the Cold War.

DOD basic research (“6.1 funding”) was actually cut $13 million to $1.4billion, while applied research (“6.2 funding”) increased 3.6% to $4.4 bil-lion. The DOD’s science and technology programs, which include research,medical research, and earlytechnology development,were increased 12.0% to$12.6 billion.

Nearly all ($6.3 billion or83%) of the $7.6 billionDOD R&D increase is tar-geted at weapons develop-ment activities (“6.4through 6.7 fundingareas”). Of the total DODfunding, about 16% or$10.3 billion will be appro-priated for U.S. Army R&D,22% or $15 billion for theNavy, 31% or $20.3 billionfor the Air Force, and nearly29% or $19 billion for otherdefense agencies.

While the DOD fundingis large, the vast majorityof it is farmed out toindustrial firms and uni-versities and colleges.Most 6.3 development is

performed by industrial companies, while most 6.1 and 6.2 research isperformed by academia.

The newly formed Dept. of Homeland Security (DHS) has now become amajor funding source for R&D in the FY2004 budget. DHS R&D wasincreased 56% to $1.04 billion. The approved DHS budget also contains anadditional $5.6 billion for the development of biodefense countermeasures,which is spread out over 10 years with $885 million is available in FY2004.The total DHS discretionary budget is huge, $29.2 billion.

Nearly all DHS R&D programs are located in the DHS’s Directorate ofScience and Technology, one of four DHS directorates (the other three areBorder & Transportation Security, Emergency Preparedness, and Informa-tion Analysis and Infrastructure). While the DHS assumed control of manyhomeland security R&D programs at other agencies, the majority of federalhomeland security-related R&D actually remains outside DHS. BioterrorismR&D programs currently within the NIH will remain there—research grantswill continue to come from and be administered by the NIH, but researchpriorities will come from the DHS. Other counterterrorism R&D in the EPA,DOD, and DOE will also continue to remain outside DHS.

Following on the heels of the successful NIH R&D budget doubling plan,the National Science Foundation had a similar five-year budget doublingplan signed into law in Dec. 2002. The FY2003 NSF R&D budget, however,failed to meet this plan, being raised only 11.9% to $3.9 billion. The FY2004budget again falls far short of the doubling plan, being raised only 4.7% to$4.1 billion. The NSF’s overall budget is up 5% to $5.6 billion, or about $1billion short of the authorized $6.6 billion funding level.

R&D at the Dept. of Energy (DOE) was increased 6.1% to $8.7 billion, alarger increase than the department as a whole, which was increased 4.2%to $23.2 billion, about 0.7% less than the administration requested.

After four consecutive years of budget increases, NASA R&D for FY2004was cut about 0.4% to $10.96 billion, which was also about 0.6% below theadministration’s original R&D budget request. While there may have beensome congressional support for increasing the NASA R&D budget this year,

the organizational outcomeof the Space Shuttle Colum-bia disaster analysis stillneeds to be resolved priorto that occurring.

And in the Dept. ofCommerce (DOC), theNational Institute of Stan-dards and Technology’s(NIST’s) Advanced Technol-ogy Program (ATP) wasonce again endorsed by theSenate in opposition toHouse and Administrationproposals to kill the pro-gram. Total NIST R&Dfunding would be cut 3.9%to $506 million and ATPfunding would be sustainedat $152 million, about $1million less than in FY2003.

Record Increases for Government R&D(billions of U.S. dollars)

Government agency FY2003 FY2004 Change

Dept. of Defense 58.696 66.323 13.0%

National Institutes of Health 26.245 27.093 3.2%

NASA 10.999 10.958 -0.4%

Dept. of Energy 8.225 8.731 6.1%

National Science Foundation 3.927 4.113 4.7%

Dept. of Agriculture 2.276 2.166 -4.9%

Dept. of Veteran Affairs 0.800 0.820 2.5%

Dept. of Transportation 0.702 0.644 -8.2%

Dept. of Commerce / NOAA 0.684 0.724 5.8%

Dept. of Homeland Security 0.669 1.044 56.0%

Environmental Protection Agency 0.643 0.654 1.6%

Dept. of the Interior 0.627 0.676 7.9%

Dept. of Commerce / NIST 0.527 0.506 -3.9%

Total 117.489 126.968 8.1%

Source: AAAS

Major Developments in Government R&D

of the respondents made nochange to their original R&Dbudget plans.

In the same survey, nearly athird of the companies queriedexpect to increase their R&Dspending in 2004 over whatthey spent in 2003. Less than10% expect to reduce theirspending and about 60% willsee no changes at all. While thenumber of companies expect-ing to increase spending con-tinues to decline from a high ofnearly 50% in 2001, the num-ber expecting to decreasespending also continues todrop (from about 15% in2000). Managers still continueto question the economic cli-mate, and while many positiveindications abound, more man-agers are satisfied to hold theline for now.

Forecast of R&D spendingThe 2004 Battelle/R&D Magazine R&D funding fore-cast is based upon data reported by the NSF on whatwas spent and performed in 2003 and previous years.This year, in particular, the NSF modified its data ofR&D behavior for 2001 and 2002 noting a 3.1%

reduction in industrialspending from 2002 to2001 and even a signifi-cant slowdown from2000 to 2001. Since theindustrial portion ofU.S. R&D spending ismore than 60% of theto ta l , a subs tan t ia lchange in its characteris directly reflected inthe overall numbers.

Whi le indus t r ia lR&D for all intents hasbeen flat for severalyears, it still dominatesthe overall character ofU.S. R&D. While fed-eral government spend-i n g i s f o r e c a s t t oincrease nearly 5% andacademic/non-profitspending is forecast toincrease more than 7%,the weight of the small

industrial increase drags down the overall spendingincrease to only about 2.5%, which is near the expect-ed inflation rate.

In the federal government arena, the Dept. ofDefense (DOD) and the DHS, for the second consecu-tive year, each received substantial increases in R&Dfunding and were the first agencies to receive theirappropriations by the first day of the federal govern-ment’s new fiscal year (Oct. 1, 2003). These largeincreases (13% or $7.6 billion for the DOD and 56% or$375 million for the DHS) are primarily focused ondeveloping tools for the war on terrorism and productsand systems for the warfighter.

And while technology commercialization in thedefense area may have occurred in the past, it is not asstrong of a primary mission for those governmentagencies as it once was. Satisfying their primary mis-sion is now their primary role. In areas where technolo-gy developed within an agency must be transferred tothe private sector to be produced, then technologytransfer will still be prioritized.

Academic R&D, closely tied to the annual 15%increases over the past five years for the National Insti-tutes of Health (NIH) during its “doubling” period, hasbeen slightly reduced in its rate of growth to reflect themore normal 3% funding increases that the NIH isnow more likely to continue to receive. A similar five-year doubling funding approval for the NSF has failedto be realized, even though President Bush authorizedit more than a year ago. The rate needed to double(approximately 15%/yr) the agency’s budget has yet tobe even closely proposed by the administration.

With increasing federal support of U.S. R&D andrelatively flat industrial spending, there has been acontinuing slight shift in the distribution of R&Dalong traditional lines. Applied research spending hasbeen relatively stable as a percentage of overall spend-ing, while basic research has increased its share (dueto government funding increases) and developmenthas seen its share reduced as a percentage of overallspending (due to flat industrial funding).

For 2004, basic research spending in the U.S.accounts for about 20% (up 3% points from 2001) ofall spending, applied research accounts for about 24%,and development spending takes up the remainingshare of 56% (down 3% points from 2001). Sharechanges over the past four years have been relativelysmall but have seen a uniform trend pattern.

Industrial changesFor more than 20 years, the industrial sector has out-spent the federal government in the conduct of U.S.R&D—in 1980, industrial R&D spending was 37% ofthe total and government spending was 36%. In mostof those years, industrial spending continued toincrease its share of the R&D funding pie, peaking in

F10 R&D Magazine–January 2004 www.rdmag.com

R&D Funding ForecastR&D Funding Forecast

Government R&D managers planon outsourcing about twice asmuch of their R&D work as doindustrial and academic R&D managers.

While more R&D organizations will addstaff than cut staff in 2004 (page F6), thelevel of the staff changes promises to besignificant according to an R&D survey.

www.rdmag.com R&D Magazine–January 2004 F11

In the 1990s, the future of basic research in the U.S. looked somewhat grimas one large industrial organization after another cut back on its support ofin-house basic and applied research. In many cases, these organizationscompletely eliminated their internal basic research efforts and focused

more on short-term payoff product development programs. What was goingto happen to the U.S.’s strong dependence on the intellectual property (IP) itgained from industrial research was the question many asked at the time.

But a funny and wonderful thing happened over the past ten years. Aca-demic and non-profit organizations, long known for their strengths, if notbreadth and focus, in the basic research arena “picked up the ball and ranwith it.” In eight short years, the amount of R&D performed in academicand non-profit organizations in the U.S. increased from $31.1 billion in1996 to $66.6 billion in 2004. These organizations also grabbed onto near-ly 23% of the total R&D performed in the U.S. in 2004 from less than 18%in 1996. They also started increasing the support of their own R&D byincreasing their funding levels from just 4.6% of all funding sources in1999 to more than 7% in 2004.

The majority of the R&D spending at universities and colleges is concen-trated at a relatively small number of a historically consistent group of insti-tutions. More than 80% of the spending is at 100 schools, with JohnsHopkins Univ., Baltimore, Md., consistently at the top, receiving nearly $1billion in funding (nearly 90% from the federal government) due, in part toits proximity to the NIH headquarters in nearby Bethesda, Md., and itsstrong life science curriculum.

The net result of these academic research developments is an intellectualinfrastructure that is second to none in the world. More intellectual property interms of scientific papers, Nobel prizes, and scientific breakthroughs comesout of the U.S. than anywhere else. And the funding forecast for 2004 contin-ues and enhances this trend.

The federal government has been the largest supporter of these effortswith 64.7% of all academic and non-profit R&D funding coming from alarge number of government agencies. Academic and government organiza-tions also continue to have strong ties with each other with several universi-ties actually operating national (Dept. of Energy) R&D laboratories, andemployees of each having roles within both facilities.

Utilization of academic and non-profit R&D dedicated resources doesn’tend at just the funding level. There are a growing number of industrial firmswanting to partner with research-based organizations. Industrial firms thatfocus on the development phase of product development at the expense ofbasic and applied research find that they still need the intellectual propertythat is gained at these early stages. Without that IP, they restrict their long-term development capabilities. Some firms find they can obtain this IPthrough the acquisition of smaller technology firms. Others find that theycan obtain this IP through partnering or collaborations.

Collaborations with academic partners also help bring a market perspec-tive to the academic research community. Battelle, an independent R&D firmin Columbus, Ohio, for example has research agreements with more than 46academic institutions. These relationships strengthen the research at both

Battelle and their university partners. Together they obtain funding that nei-ther organization could have received alone.

All of these actions have been shown to strengthen the U.S. academicand non-profit research infrastructure. One of the primary implementationsof commercializing these research efforts is by creating an incubator withrelatively low cost and easy access to the academic IP. Incubators have con-tributed to U.S. entrepreneurial activities for about twenty years. Those thatfocus on technology-based companies are becoming more numerous andsophisticated, and are contributing to marked increases in the technologyfirm’s sales, employment, and contributions to local economies.

According to a National Benchmarking Analysis of incubators createdby the National Business Incubation Assn., Athens, Ohio, and the U.S.Dept. of Commerce, about half of the technology incubators focus oninformation technologies, about a quarter on biotech and biomedicalapplications, and the remaining quarter on a mix of client/company tech-nology concentrations.

Other countries find that they cannot match the research capabilities ofthe U.S. and have created incubators of their own where they can convertthe basic research created in the U.S. into commercial products. Thesecountries are developing incentives to attract such incubators.

Defending the U.S.’s research IP base will become a major challenge inthe coming years, especially in those situations where foreign incubatorsare able to more effectively and quickly cover the middle ground betweenresearch and commercialization. Part of the solution may be to broaden thesources of venture capital and encourage strong commercial licensesamong U.S. companies.

Federal Academic Support Continuing (2001, thousands of U.S. dollars)

University Total R&D FederalSupport

Johns Hopkins Univ. 999,246 879,741

UC Los Angeles 693,801 312,858

Univ. of Wisconsin-Madison 604,143 304,009

Univ. of Michigan 600,523 396,117

Univ. of Washington 589,626 435,103

UC San Diego 556,533 343,276

UC San Francisco 524,975 277,489

Stanford Univ. 482,906 384,468

Univ. of Pennsylvania 469,852 351,996

Univ. of Minnesota 462,011 264,289

Source: NSF

Everything Looking Up for Academics and Non-Profits

1999 at 67.0% (compared to the federal government’s27.5%). Since then, flat or even declining industrialspending has shaved the industrial R&D spendingshare to 62.3%, while strong government spending hasincreased its share to 30.7%.

A number of changes affecting the support of indus-

trial R&D have occurred over those past four years. Onthe negative side, U.S. industries were exposed to astrong recession, increasing offshore outsourcing ofmanufacturing capacities, an extreme overproductionsituation in the telecommunications arena, the collapseof the late-1990s Internet bubble, the realization of

strong foreign high-tech resources, thes lowing of newproducts in the phar-maceutical arena,the lack of block-b u s t e r p r o d u c t sbeing developed inthe biotech industry,and ( in 1999) anapparent shortage ofhigh-tech trainedworkers.

On the positiveside, U.S. industrieswere seeing increas-ing defense andhomeland securityproduct demands,the emergence ofnanotechnology-based products andactivities, the devel-

opment of high-speed computing, increasing gov-ernment support of basic and applied researchactivities, continuing productivity improvements into2004, a strong economic recovery going into 2004, and(in 2004) the availability of high-tech trained workers.

Going into 2004, U.S. industries have a number ofchallenges that they need to face to improve and rein-state their high-technology leadership and commercialsupplier roles. Some of these challenges include:

n How to offset the existence and development offoreign technology resources, like India’s softwareindustry and China’s manufacturing powerhouse.

n How to more fully take advantage of the U.S.’sstrong academic capabilities and facilities.

n How to turn the world’s leadership role in intel-

lectual property into a commercial advantage.n How to more fully utilize the strong U.S. gov-

ernment national laboratory facilities and capabilities.n How to take commercial advantage of the U.S.’s

leadership role in defense and national security position.n How to gain a competitive advantage in the

emerging nanotechnology, grid-computing, bioinfor-matics, genomics-based health care, and wirelesscommunications areas.

Investors appear to be confident in U.S. industry’sability to conquer these challenges. Indeed, U.S. indus-try often needs a strong challenge to rise to the occa-sion. The recovery of the stock market indicesthroughout the last half of 2003 reflects on the abilityof U.S. industry to dominate technology-based marketsand develop new strategies for taking unique competi-tive positions.

Increased outsourcingIndustrial organizations expect to outsource about 7%of their R&D activities in 2004, about a 12% increasefrom the levels in 2003, according to the R&D Maga-zine reader survey. Outsourcing organizations used bythese companies include:

Other companies 53%Commercial laboratories 53%Universities 51%Federal laboratories 14%Non-profit organizations 12%Foreign laboratories 11%Other 12%The primary reasons that companies will outsource

some of their R&D activities include the lack of inter-nal capabilities or resources, to avoid increasing theirown R&D staff, to keep an internal focus on core com-petencies, reducing the cost and speed to market, useof specialized equipment or instrumentation, andswitching from a fixed to a variable cost structure.

More companies, even some old-timecentral research-based organizations like3M are starting to redefine how they do andfund R&D, utilizing outside resources tobring technology into their core areas. Out-sourcing R&D activities is also a way tocompensate for previous cuts in R&D staffsand facilities over the past three years. Oftenorganizations are reluctant to make largeinvestments in infrastructure given theuncertainty of the economy—it is easier totake the cash and outsource for the next cou-ple of years to more fully understand theeconomic climate.

Another trend being noticed is that indus-trial companies are focusing on business per-formance at the expense of early-stage R&D.When this occurs over a period of time, the

F12 R&D Magazine–January 2004 www.rdmag.com

R&D Funding ForecastR&D Funding Forecast

R&D Split Along Traditional Lines(FY2003 R&D distribution)

Basic AppliedResearch Research Development Performance

Federal 8.5% 13.0% 7.2% $ 25.0 B (8.8%)

Industrial 15.9% 64.1% 89.1% $196.1 B (69.1%)

Academic 62.7% 16.1% 2.0% $ 47.7 B (16.8%)

Non-profit 12.9% 6.8% 1.7% $ 15.0 B (5.3%)

Total 100.0% 100.0% 100.0% $283.8 B (100.0%)

($54.1 B) ($67.8 B) ($161.9 B)

Source: NSF

The distribution of R&D budgets haschanged slightly over the past severalyears, due likely to smaller staffs and theresultant smaller salary requirements.

U.S. research is predominantly performed by academic and government organizations while industrial labs normally perform development work.

www.rdmag.com R&D Magazine–January 2004 F13

In 2004, the U.S. will spend about $290.8 billion on R&D. Or will we? Thepreponderance of multinational corporations with their integrated globalR&D budgets and unidentified geographical boundaries has made theregionalization of R&D a more difficult measurement task than it was in

the past. Automotive companies, with their huge R&D budgets (which ofteninclude a large amount of development monies for new models each year),are prime examples of this situation. So too, are large pharmaceutical com-panies, large chemical companies, software developers, and large semicon-ductor manufacturers.

The globalization of R&D also makes the regionalization of R&D thatmuch less measurable for determining the economic status of local commu-nities. The stateless corporation, once a topic of discussion in the past, hasonce again become topical as the Internet and related technologies allow acorporate evolution toward an integrated global network of operations.

Corporations are just now beginning to move or spread out their corpo-rate functions to areas that make the most sense from a financial and orga-nizational standpoint. A large European pharmaceutical firm recently movedits large R&D base from Europe to the Boston area to take advantage of thehigh concentration of life science technology resources available there. Acomputer peripheral company has dual headquarters in both Switzerlandand California, allowing it to make faster business decisions. And of course,it has always been smart business to have at least a small local R&D centerwithin the country you are doing business in to ensure that the local con-sumer demands are being satisfied.

Another problem in forecasting European and Asian R&D is that stan-dardized government data are not readily available for the current year, as itis from the National Science Foundation in the U.S. The most recent data

available are generally two-years old, which would put comparative data onthe other side of the global recession and provide somewhat meaninglessinformation.

In Europe, the Sixth Framework Programme (FP6) is the EuropeanUnion’s main tool for the funding of research. FP6 covers a four-yr period,2003 to 2007 and is approximately $21.8 billion, representing an increase of17% from FP5, and about 3.9% of the Union’s total budget and about 6% ofthe Union’s civilian research budget ($360 billion).

Within FP6, seven technology areas have been chosen to pursue focusedR&D: genomics and biotechnology for health, information society technolo-gies, nanotechnologies and nanosciences, aeronautics and space, foodsafety, sustainable development, and economic and social sciences.

In Asia, Japan has the strongest R&D infrastructure. According to arecent survey by KOTRA, a Korean government organization for the promo-tion of trade and investment, Japan was ranked first ahead of China, Korea,Singapore, Taiwan, and Malaysia in terms of offering a favorable climate forR&D activities. China was ranked first in terms of offering R&D workforces,because of its broad R&D talent pool, and low labor costs when comparedto other Asian economies. The majority of those surveyed indicated thatsecuring an R&D workforce is the most difficult item that they face in run-ning their R&D organizations in Asia.

While the survey was performed by a Korean agency, the survey respon-dents warned of a “hollowing out” of R&D in Korea. Most Korean youth cur-rently are avoiding working in science and engineering areas. There is also afalling morale among the Korean R&D workforce, and the government hasbeen criticized for failing to improve outdated policies for improving theplight of R&D talent.

Selected Asian R&D OrganizationsR&D Spending

(Billions of U.S. dollars)2003 2004

1 Toyota Motor 3.827 3.621

2 Honda Motor 2.966 3.322

3 Nippon Telegraph & Telephone 2.526 2.364

4 Matsushita Electric 2.374 1.680

5 Hitachi Ltd 2.197 1.842

6 NEC Corp. 2.112 1.953

7 Canon 1.956 1.983

8 Fujitsu 1.809 1.469

9 Toshiba 1.503 1.146

10 Nissan 1.479 1.305

11 NTT DoMoCo 0.677 0.652

12 Sanyo Electric 0.598 0.519

13 Eisai 0.451 0.465

14 Taiwan Semiconductor 0.441 0.506

15 Fuji Heavy Industries 0.354 0.337

Source: Schonfeld & Assoc., R&D Magazine

Selected European R&D OrganizationsR&D Spending

(Billions of U.S. dollars)2003 2004

1 DaimlerChrysler 6.391 6.482

2 Siemens 6.349 6.765

3 Glaxo SmithKline 5.616 6.409

4 Aventis 4.190 4.659

5 Volkswagen 3.695 4.358

6 BAE Systems 3.661 4.184

7 Nokia 3.642 4.086

8 Roche Holdings 3.261 3.487

9 AstraZeneca 3.240 3.414

10 Koninklijke Philips 3.198 3.309

11 Novartis 3.183 3.267

12 Bayer AG 2.800 2.974

13 Ericcson 2.360 1.292

14 Fiat SPA 1.753 1.809

15 Alcatel 1.584 0.832

Source: Schonfeld & Assoc., R&D Magazine

Global R&D Affected by Transnationals

companies find they have gaps in their R&D pipeline.To avoid this problem, the companies can acquire com-panies with the specialized technology they need orthey can outsource some of their R&D activities.

Terrorism, R&D, and the DHSThere were few effects on the funding or performanceof R&D in 2002 immediately following the events ofSept. 11, 2001—there just wasn’t enough time to planor develop any coordinated programs. In 2003, there

were a few programs start-ed in the DOD, but theDHS had just been estab-lished in late-2002 and ithad no infrastructure inplace to coordinate, solicit,or track its own R&Ddevelopment programs.The current fiscal year isthe first full year whereR&D programs targeted atcombating terrorism canbe fully supported andcoordinated.

The FY2004 federalbudget authorized a $1.04billion R&D budget forthe DHS, a 56% increaseover the FY2003 budgetof $669 million. DHSR&D funding replacessome programs that theDHS took over from other

agencies and in other areas it augments thoseprograms. Bioterrorism R&D programs with-in the NIH will remain in FY2004 and othercounterterrorism R&D programs within theDOE, DOD, and EPA will also continue toexist outside the DHS (NIH bioterrorismresearch grants are allocated within the NIHR&D budget).

To a small degree, homeland security pro-grams divert some resources from the devel-opment of the DOD’s warfighter systems.There are a limited number of trained tech-nologists who are familiar with weapons ofmass destruction (WMD), for example, whowill not be able to cover the R&D require-ments for both homeland security and war-fighter systems at the same time. Hiring anddevelopment of researchers able to coverthese areas has already begun, but is a slowand lengthy process.

Outsourcing and employment While China drove down costs in manufac-

turing, India’s intellectual prowess appears to be doingthe same thing in the service arena, which includessoftware development. India has become a preferredarea for development of digital equipment, financialservices, and even industrial plants. Large U.S.-basedcorporations like GE Medical, General Motors, FordMotor Co., and Microsoft have R&D operations inIndia, while other companies are planning large engi-neering operations there. The technical job market inIndia “is in a frenzy right now” according to Ron Hira,chairman of the R&D policy committee of the IEEE,NY. In a visit only a year ago, Hira adds, this level ofactivity was not present.

Annual exports of technology and office servicesfrom India are expected to increase from $2 billion in2003 to $24 billion in 2008, according to the NewYork-based market analysts McKinsey & Co. India’sIT services work force is expected to triple from thecurrent 650,000 to nearly 2 million by 2008. Pharma-ceutical and biotech companies are already looking totake advantage of this country’s growing pool of tech-nology graduates for some of their future biotechnolo-gy and clinical testing programs.

Offshore outsourcing, high unemployment, and aweak hiring market creates a strong situation ofemployers and a weak situation for potential employ-ees. Only about a third of those unemployed over thepast several years have found new jobs at their previ-ous or higher salaries. About 25% of those unem-ployed found they had to take jobs with salaries thatwere 30% or more lower than their previous salaries,also according to McKinsey.

Despite these concerns, the overall job market is

F14 R&D Magazine–January 2004 www.rdmag.com

R&D Funding ForecastR&D Funding Forecast

Survey respondents revealed distinct breakdowns in how development workin performed in industrial and government organizations.

More than three-quarters of the respondentsin a recent R&D Magazine survey said theydo not have an R&D presence in China andonly 4% are building a new facility.

expected to be better than it has been over the past sev-eral years, according to Milwaukee-based, ManpowerInc. Employers are expecting a 7% improvement inhiring in the first quarter of 2004 over the first quarterof 2003, according to their surveys. The Asian market,however, is expected to make similar or even largergains with Australia seeing a 15% improvement, HongKong 12%, and Singapore 6%. Even Europe will seethe effects of the improving economy with the UK andSpain each seeing 9% gains in hiring, Sweden 8%, andNorway 10%. Germany is expected to see a 14% dropin hiring due strong hiring gains last year. The gainsare similarly expected to be seen in both industrial andservice areas.

With productivity increases, a weak U.S. job market,and a fragile economy, technology employees areexpressing concerns about their job security and jobsatisfaction in numerous surveys. Job satisfaction in anengineering survey fell from 70% in 2001 to 60% in2003, while job security plummeted from 60% to 45%over the same period. A pharmaceutical survey revealedsimilar trends concerning job security, although to alesser degree.

Sales of laboratory products is a strong indicator ofthe economic health of the R&D sector. According todata collected by the Laboratory Products Association,Alexandria, Va., sales of lab products in the third quar-ter of 2003 rose by more than 4% over previous yearsales. While remaining cautious about 2004 econom-ics, most companies saw signs of growth across allproduct segments with even stronger growth predic-tions than those seen in late-2003.

Emerging technologiesWith a strong economy, strong government R&Dfunding, and an improving industrial technology sec-tor, what are the growth technologies that you shouldbe watching in 2004 and beyond? To be sure, home-land security will continue to be a growth area forsome years to come as specific technologies are justnow being developed that will become commonplaceproducts in the future.

Homeland security technologies to watch includethose focused on aviation security, like testing anddetection equipment, simulation systems, and cargoscreening equipment. Development of chemical sen-sors and air monitoring instrumentation will also bepart of this effort.

The development of new medical devices, regener-ative medicine, and biotechnology also hold promisein a world of aging citizenry. Medical equipmentR&D has continued to thrive throughout the recessionand many new technologies that focus on diagnosticmonitoring, tissue repair, drug delivery, and cell-basedtherapies are now becoming available.

Materials development has remained one of the

principal core R&D technologies. Implementations ofnanotechnology in the core materials area will becomeone, if not the, strongest and earliest successful appli-cations of nanotech. A number of organizations arealready working on studying polymer modifications atthe nanotech level for development of whole newclasses of materials.

Computer simulation and modeling systems alsoare high growth areas as manufacturers continue tolook at ways to improve their product developmentcycles and product designs. Continuing improvementsin computer hardware, design and analysis software,and networking systems will provide opportunities foradvancement.

Genomics and proteomics continues to be looked atprimarily in academia as the “ultimate” personal healthcare solution. Much advanced research is being per-formed in U.S. centers of excellence like the Broad Insti-tute, Cold Spring Harbor, and Washington Univ. Fewhuman-based applications of this research are forthcom-ing, but numerous plant and animal applications are like-ly to be developed over the next several years.

The AuthorsThe 2004 Battelle/R&D Magazine R&D Funding Fore-

cast is the ninth consecutive year that Battelle and R&D havepartnered to create this study.

For Dr. Jules Duga, a Senior Analyst at Battelle in Colum-bus, Ohio, the 2004 Forecast is the 25th consecutive R&Danalysis he has performed. Duga has become the preeminentexpert on U.S. research and development trends and strate-gies. His analyses are searched out and quoted by govern-ment, industry, and academic researchers across the U.S. Toremain at one organization for more than 25 years is anaccomplishment all by itself in today’s changing R&D envi-ronment, but to remain recognized in a high-technology areawhere few others reside is a singular accomplishment.

For R&D Magazine, the 2004 R&D Funding Forecast isits 46th annual report on the state of the R&D community.The very first issue of R&D in January 1959 reported on the$12 billion that would be spent on U.S. R&D that year. Thisyear’s report is co-authored by Editor in Chief Tim Studt.

www.rdmag.com R&D Magazine–January 2004 F15

>> ResourcesAbbott, Langer & Associates, Crete, Ill., Compensation in R&D ($995.),

708-672-4200, www.abbott-langer.comAmerican Association for the Advancement of Science (AAAS),

Washington, D.C., 202-326-6400, www.aaas.orgBattelle, Columbus, Ohio, 614-424-6424, www.battelle.orgIndustrial Research Institute (IRI), Arlington, Va., 703-647-2580,

www.iriinc.orgNational Science Foundation (NSF), Arlington, Va., 703-292-8774,

www.nsf.gov/sbe/srsR&D Magazine / Reed Business Information Scientific Group, Morris

Plains, N.J., 973-292-5100 x371, www.rdmag.comSchonfeld & Associates, Inc., Riverwoods, Ill., 2003 R&D Ratios &

Budgets ($395), 847-948-8080, www.saiBooks.comU.S. Dept. of Commerce, International Trade Administration (ITA),

800-872-8723, www.ita.doc.gov