Closing the R&D Gap

Abstract

This study identifies a clear need for government policy to address the widening R&D gap between the United States, Japan and Germany. In 1991, the United States spent only 1.9 percent of its GDP on non-defense R&D compared to 3 percent for Japan and 2.7 percent for Germany. The possibility that this gap can be closed through tax incentives, such as the Research and Experimentation tax credit, appears highly unlikely. A detailed review of this credit shows that it had a relatively minor impact on R&D spending since its inception in 1981. More direct policies are likely to be required if this gap is to be narrowed. Immediate gains can be made in the conversion of military R&D expenditures to address other public needs. While the federal government has reduced its real expenditures for military R&D since 1987, the corresponding increase in non-defense R&D has not kept up with GDP growth. The failure to convert military to non-military R&D will only exasperate the current R&D gap and jeopardize U.S. shares of high technology markets. Finally there is the question of how to improve the federal R&D program. In particular, the congressional practice of earmarking academic R&D funds and the Department of Defense's (DOD) policy of reimbursing independent R&D lack accountability. Furthermore, non-defense R&D projects should be administered by the appropriate federal agency rather than by DOD which has inherited several as a result of economic conversion. Finally, a process needs to be established for evaluating the effectiveness of government R&D expenditures.