The US has long been a leader in R&D thanks to a network of federally supported research facilities in universities and federal laboratories, private sector support, and a constant flow of people and ideas between the two.

Academic R&D investment has allowed for long-term, high-risk research that does not have a clear commercial payoff or one that is likely years or decades away. “Industry-based research, on the other hand, tends to be more focused on development, looking ahead, at most, one or two product cycles,” says Peter Harsha, government affairs director at academic society Computing Research Association in Washington, DC.

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China competition

Economic development in the US has benefited from federally supported R&D. But competition from abroad is mounting, particularly from China, and the federal budget is facing cuts. Think tank Information Technology and Innovation Foundation (ITIF) projects that between private industry and the government, the US is expected to invest $423.7bn in R&D this year, compared with China’s $220.2bn.

“When you look at total global R&D investment, the US captures about 22% and China about 14.7%,” says Stephen Ezell, a senior analyst at ITIF. “But when you look at trend lines and the rate of growth in R&D investment, China accelerates ahead of the US,” he says. In fact, ITIF estimates that China will surpass the US in actual R&D investment by 2023. The US will also face increased competition from other countries around the world as well.

The reason is twofold. First, China has significantly increased its national R&D intensity (R&D as a share of GDP) since 1995. Notably, from 1995 to 2008, it increased by 170.2%, compared with 10.4% in the US. Second, in 2011, China announced plans to invest $1500bn in seven strategic emerging industries: energy saving and environmental protection; the new generation of information technology; biotechnology; high-end equipment manufacturing; new energy; new materials; and new energy vehicles.

“To make up the difference, the US would have to invest the equivalent of a stimulus package every year for the next seven years and focus it solely on investment in R&D and innovation if we are going to try to keep up,” says Mr Ezell.

Funding cuts

But with US federal budget cuts looming and the hatchet likely to hit swift and hard, cuts to R&D expenditures will affect all US government agencies, and have an impact upon collaborative work with universities and corporations.

“Cuts to federal R&D funds will also impact private companies, especially fledging biotech companies that rely increasingly on grants,” says Barbara Schilberg, chief executive of BioAdvance, a Philadelphia-based organisation that supports life science start-ups. “It’s already incredibly competitive because private capital for early-stage development has shrunk,” she says.

Both early- and late-stage companies are being hit. “For many, the government is a customer and a funder,” says Ms Schilberg. Some companies are both funded by and sell to the Department of Defense (DoD).

“A big piece of the cuts will be out of the DoD,” says Marty Grueber, research leader at Battelle, a global R&D organisation headquartered in Columbus, Ohio. “These will impact the corporate side and obviously academic research doing defence R&D. It will be significant,” he says.

Battelle reports that companies such as Airbus, Boeing and Lockheed Martin that receive strong government R&D support will be impacted, as will information and communications technology and pharmaceuticals industries. Sectors such as chemicals, metals and steel, photovoltaics, nuclear energy, food products, textiles and production capabilities have already been lost to emerging economies along with their integral R&D.

Under US sequestration proposals, the National Institute of Health (NIH) alone would lose $2.8bn in funding; the National Science Foundation, nearly $600m.

Science’s dark day

The American Association for the Advancement of Science emphasises that such cuts are not only tragic for science, but bad for an economy whose growth is driven by science and technology advancements.

“In the near term, we’re talking about job loss,” says Steve J Fluharty, senior vice-provost for research at the University of Pennsylvania, where the research portfolio for 2012 was $900m, $540m of which came from the NIH for research in science, medicine and engineering.

In the long term, he sees such cuts impacting discoveries that improve the ability to both treat and ultimately prevent disease. “We’re talking about dramatically reducing the rate of discovery and innovation in this country, which has traditionally been the lifeblood of our economy,” he says.

Rick L Weddle, president of the International Association of Science Parks, worries that funding reductions for basic research will have a significant long-term impact. “Short-term earnings pressures on companies, combined with the difficulty in sustaining a pipeline of intellectual property that has commercial value, means that less basic research will occur,” he says. “In the long run, productivity will suffer and profitability will be damaged.”

Mr Weddle sees the belief that manufacturing can be offshored without a long-term impact as nothing short of folly. “Much actual R&D happens on the shop floor. As manufacturing goes, so ultimately goes R&D,” he says. According to ITIF, US multinational corporations increased their investment in R&D overseas seven times faster than in the US.

“We used to see manufacturing going overseas and the R&D staying in the US,” says Mr Ezell. “But now R&D is going offshore and manufacturing [leaving] behind it.”

Offshore migration

PepsiCo, the world’s second largest soft-drink maker, is a case in point. Last year, it opened its largest research centre outside the US in China in an attempt to boost sales there. General Motors is another example of this trend. Last November, it unveiled its latest global research centre in China, where it hopes to take advantage of the country's vast supply of engineering graduates to drive its development of a new generation of electric vehicles.

Mr Weddle emphasises that China has particularly recognised that investment in R&D is necessary to build the intellectual property needed to drive productivity gains and ultimately long-term prosperity. “Other countries also recognise this fact. The growth in public funding support for research, science parks, incubators, technology cluster systems and other innovation assets illustrates this point,” says Mr Weddle.

As the US has reduced basic research funding, it has also reduced investment in other educational and innovation infrastructures that support the development of high-growth, technology-oriented economic developments.

“If these trends are sustained [in] the long term, the US will begin to lag further and further behind developing countries,” adds Mr Weddle.

European business ventures

European companies are also investing heavily in R&D centres in China, but governments are demonstrating a recognition of the importance of growing R&D at home. While the EU budget calls for cuts across the board, its next seven-year general R&D budget for 2014 to 2020, known as Horizon 2020, calls for $14bn, or 25% increases, in R&D investment.

“Germany and Sweden are doubling their R&D investments,” says Mr Ezell. “Even [the UK], which is making tough budget decisions, is investing in R&D.” The UK has just announced plans to invest $1.5bn to catapult a nationwide network of technology innovation centres.

“If the US does not make a similar move to make productive investments in future technologies and industries, US firms and the economy will fall increasingly behind. Its rate of long-term innovation will slow down and its ability to bring on new sectors like life sciences will be compromised,” says Mr Ezell.