Why We Do R&D (A Practitioner's Tale)

Abstract

Today, more than ever, we need to examine the policy issues within RD it started as a $2 million/year expense and today remains a highly successful $100 million-plus high tech business. The principal output was spin-off companies, some unplanned, with over a $1 billion a year of new business. In short, successful R&D can make Hometown, U.S.A. rich. I'll return to this idea as a closer. In the United States, corporate R&D programs earn tax relief. Today we use many organization forms partnerships, separate firms, special-purpose contractors, and others. They don't affect the amount of relief, which is based on standard definitions from accountants: these rules contain contradictions. The basic notions as to deductibility of risk-laden expenses are sound within American expectations, which are for high returns. We can alter the legislative and thus the tax environment, and there are very large money consequences, for us as investors and as advisors. R&D is one of the several intangibles that affect the value of innovation in business. The National Innovation Initiative, a report of a recent convening of business leaders who are once again concerned for U.S. technical and business leadership, under the auspices of the Council on Competitiveness, is our current avenue for prompt influence and change in the innovation space. The agenda is rich, complex and offers much to all. Industrial Policy? Is there an over-riding U.S. Industrial Policy that provides an umbrella for the various elements in the complex NII agenda, and that thus dominates our choices? Our government expresses an official distaste for industrial policy when that is defined as the search for and selection of winners and national corporate champions. Subsidies and tariff protections are also contrary to World Trade Organization rules. So, officially, NO--the U.S. does not have an Industrial Policy. But what we do have to carry the Nil forward is called Private R&D, and it is so big that there are several policy influences, besides taxes, that affect our performance. What about performance? Do we do as well as we should? U.S. R&D expense has reached $300 billion per year. The Federal government buys or employs about $135 billion worth of work directly each year. This directed activity has impacted the entire U.S. R&D culture. There are some real successes, like the Defense Advanced Research Projects Agency (DARPA), some National Labs and the National Science Foundation. DARPA has altered industrial practice and even changed the pace of academia. The NSF has shown true leadership in its Engineering Research Centers program, a remarkable venture in contracted R&D with cost sharing by industry, a feature added through the intervention of the Industrial Research Institute into the rule-setting process. The National Labs offer clusters of large instruments to public access. The federal expenditure of about $135 billion is handled very much as a planned expense with a set of defined benefits, and this roadmap approach affects industrial practice. The U.S. National Academies join the process via consultation with the Congress, as they have for almost 150 years. Do Our Industrial Investments in R&D Work? The balance of the $300 billion total, less the federal direct outlay, or about $170 billion, is funded by industry through captive programs, new companies, partnerships, and registered collaborations, some multinational. Remember that the Congress and the Internal Revenue Service allow tax relief on all private R&D. Since statutory corporate tax rates are as high as 48 percent, the relief might amount to as much as $60 billion per year of concession on the remaining $170 billion of expenditures. …