R&D: The current state of affairs

Sunday, September 03, 2006 | 08:45 AM

I am not a big fan of share buybacks. I have said in the past that my first priority would much rather be R&D versus a buyback; A special or regular dividend is also preferable. 

When the company I sit on the BoD on had a windfall from a patent matter last year, we authorized a 90 cent special one time dividend -- and this from a small tech company, no less.   

Today's NYT has an article on the state of R&D at the moment. It is a mixed picture, but with some negative trends developing:  "While the United States remains the world’s biggest investor in research and development, there are troubling signs. At a time when some of the nation’s most formidable competitors are investing heavily in research, the United States is treading water."


US R&D versus Other Nations
click for larger chart
Courtesy of the NYT


The prime issue in my book is the threat from China, and to a lesser degree Korea and Japan. During the 90s, the U.S. regained much of its luster thanks to our enormous technology growth; Think of how much the U.S. dominates the entire PC, Networking, Storage and Internet sectors  -- that's the result of R&D from the late 80s.

However, we are starting to slip in biotech -- think stem cell research. I'm not sure who else might be contesting with us for Nano-technology; And I do think that -- unless Oil drops below $50 -- the field of alternative energy is now wide open. I'd love to see a special Capital Gains tax exemption for long term investing in that field  (i.e., 5-10 years).

Here's an excerpt from the NYT piece:

"Total R.& D. spending in the United States grew for decades until 2002, when it dropped for the first time in 50 years after the crash of technology stocks. According to the latest figures from the National Science Foundation, such spending climbed slightly in 2003, to $291.9 billion, after adjusting for inflation, and is estimated to have increased to $312.1 billion in 2004.

Because the official numbers stop there, industry groups try to make more up-to-date estimates. Battelle, the science and technology company based in Columbus, Ohio, working with R&D magazine, expects research and development spending to grow 2.9 percent this year, to $328.9 billion. That growth rate is around the historical average, and about half the average growth of the late 1990’s.

The underlying picture, however, is less comforting than these numbers suggest.

After several years of spending a bit more on research and development, the federal government is cutting back in some areas, after adjusting for inflation. While the government will continue to spend more on developing weapons systems and spacecraft, overall government investment in basic and applied research — the foundation of the nation’s innovative capacity — is in some ways shrinking.

Kei Koizumi, director of the research and development budget and policy program at the American Association for the Advancement of Science, says federal investment in research as a share of the nation’s total economic output is projected to drop to 0.4 percent in 2007 from 0.5 percent this year. (While 0.4 percent has been the average since the 1970’s, Mr. Koizumi said it was widely recognized that as technology drives more of the economy, research to replenish the knowledge base for future innovations becomes more important.)

It wouldn’t be so bad if this were just a blip. But R.& D. investment has been a declining priority for the government — once the dominant source — for several decades. Forty years ago, the government accounted for 67 percent of total R.& D. spending; today, its share is roughly 30 percent. Corporate America makes up most of the rest."

Worth thinking about: What is the next major catalyst for economic growth over the upcoming 2 decades?


The State of Research Isn’t All That Grand
Economic View
NYT, September 3, 2006

Sunday, September 03, 2006 | 08:45 AM | Permalink | Comments (26) | TrackBack (0)
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I would be alarmed, if I thought GOVERNMENT was the only conduit for the planning and funding of research and development. (As if government had a monopoly on competency.) In the past government certainly tried to be the exclusive source for supervision and money.

I would argue MARKETS are more efficient, especially when the objectives are obviously lucrative. Thus government R&D would be more appropriate for “research for the sake of research”. If government spends more money on research, for the sake of spending more money, inefficiency will result.

In the case of stem cell research, there is no shortage of private investment money. A government running a deficit should avoid frivolous spending. Some businessmen are looking for a handout and have duped bleeding heart liberals.

What will be the catalysts of the next big thing? Probably all great developments can be connected to some government research, but this demonstrates the pervasiveness of government research, not its necessity. Looking backwards, some of the greatest changes in the last five decades can be linked to the government, such as the Internet. However, most of the development of the technology and infrastructure of the Internet occurred in the private sector.

Finally, I wonder about the ownership of discoveries. If the government (or Al Gore) built the Internet, how much investment was recouped? Same goes for stem cell research. Are we redistributing income from tax payers to share holders?

Posted by: James Mitchell | Sep 3, 2006 9:38:54 AM

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