The Cold War era represented the golden age for U.S. research and development (R&D) spending. First there was the massive effort to create atomic weaponry in World War II and the subsequent arms race. Then, spurred by the surprise and fear created when the Russians launched Sputnik, the first satellite to orbit the earth, the U.S. embarked on a massive public/private partnership that eventually landed American human beings on the moon first.
The flood of space-related R&D spending resulted in the development of an incredible array of technology, including the GPS system, CAT scanners, LED lighting, freeze-dried foods and, of course, the internet itself. The hallmark of all of these technologies has been the transfer of publicly funded R&D to private interests for development and monetization.
We’ve seen a similar approach with “Operation Warp Speed,” the successful effort to create COVID-19 vaccines in a safe and speedy manner.
In times of crisis, the federal government — and corporate America — step up and push through solutions. But in times of relative peace and tranquility, what happens to the investment in innovation?
What happened to U.S. R&D?
Since the end of the Cold War, government-backed research has plummeted 54% as a percentage of the U.S. gross domestic product. Corporate America continues to invest in research and development, but gone are the days of such successful private R&D investments as Bell Labs or Xerox PARC, where the immediate return on investment was not clear. Corporate R&D now must pay off.
With little irony, Nathan Myhrvold, former chief technology officer for Microsoft and the founder of Microsoft Research, has admitted that was the case for Microsoft Research in 1991. Microsoft, of course, benefited greatly from Xerox PARC’s development of the graphical user interface and the computer mouse, among others.
“When I created Microsoft Research, one of the largest industrial research labs founded in a generation, Bill Gates and I were very clear that basic research was not our mission,” Myhrvold wrote in Scientific American. “We knew that unless our researchers focused narrowly on innovations we could turn into revenues quickly, we wouldn’t be able to justify the R&D budget to our investors. The business logic at work here has not changed. Those who believe profit-driven companies will altruistically pay for basic science that has wide-ranging benefits — but mostly to others and not for a generation — are naive.”
The result? “Altruistic” investment in research performed at the governmental level has declined, and altruistic research at the corporate level has all but disappeared.
Compare this to China, which is making significant government funded R&D investments in critical technologies like quantum computing, robotics, biotech and defense related technologies, says Sanjai Bhagat, finance professor at University of Colorado and author of Financial Crisis, Corporate Governance and Bank Capital.
“China started applying for many more patents than they used to and are receiving them,” Bhagat says. While the U.S. may still be ahead on that score, many of the tech companies here are more interested in staying two steps ahead of the competition — the latest advances on a smartphone, for instance. That may not be another patent, but that’s always innovation, he says.
Innovation and the Board
Bill Goings uses the term “innovation” more often than “R&D.” Goings is a director of True Blue, Inc. and Penn Mutual Insurance Company and sits on an innovation and technology committee for one of his boards.
“The board has to evaluate, at a fundamental level, how the company’s existing business model is performing and what we should change to enhance and improve it. Do we have the correct operating and risk management processes, the right leadership team and competencies? Are we competing in the right markets, and is our value proposition sustainable?
“But there’s another lens that a board needs to have. It needs to scan the environment and ask who is out there that’s looking to disrupt what we’re trying to do. Then decide how to avoid disruption or instead if the company should be the disruptor.”
The current U.S. administration has pledged to reinvigorate the federal government’s commitment to R&D in the American Jobs Plan. At present, the plan pledges $50 billion to the National Science Foundation for R&D, $30 billion in research and development aimed at spurring jobs in rural areas and $50 billion for semiconductor research and manufacturing.
“Public investments in R&D lay the foundation for the future breakthroughs that over time yield new businesses, new jobs and more exports,” according to a White House release. “However, we need more investment if we want to maintain our economic edge in today’s global economy. We are one of the few major economies whose public investments in research and development have declined as a percent of GDP in the past 25 years. Countries like China are investing aggressively in R&D, and China now ranks number two in the world in R&D expenditures. In addition, barriers to careers in high-innovation sectors remain significant.”
Goings says public-private partnerships are the best way to move forward with innovation.
“Are we doing enough? No. But do you see a lot of energy? Yes,” he says. “I think it will be important that the private-public partnerships, between corporations and government, continue to foster innovation and invest in our future.”
Returning to the cutting edge
China’s advancements seem to be coming at a breakneck speed, but Kori Schake of the American Enterprise Institute says this type of progress isn’t unprecedented, nor is it insurmountable.
“China is advancing as Japan did in the 20th century, stealing intellectual property and reverse engineering to leapfrog the time it took others to innovate,” she says.
Schake says U.S. innovators and business owners need a restoration of confidence to kickstart a new age of R&D.
She points to the metaphor by Adam Smith, Scottish philosopher and economist, comparing the free market to an “invisible hand,” that living in a freer society will lead to its betterment through self-interest.
“I genuinely believe free societies have the advantage because we have intellectual freedom,” she says. “The way China could succeed is if we stop being the U.S. and start being China.”
Bhagat says he believes the U.S. still has the advantage over China and will continue to have for years to come.
“There are at least 50 or so world-class engineering and physics departments in our universities — that’s a lot. They can produce a lot of very cutting-edge work,” Bhagat says. “Then we have companies like Raytheon and Lockheed Martin that do some of that as well. However, China is able to expropriate some of this cutting-edge classified research via questionable methods.
“But I think it would be a big mistake if we just sit back and say, ‘OK, it’ll be all fine.’ I think we need to sensitize both corporate leadership and our political leadership to counter existential threats to our country’s security, and that is not long-term — that threat is there right now. It’s not something that you can tolerate.”