Will the Private Sector Continue to Lead the Way on R&D Spending?
Subscribe today for Free Enterprise Updates
- Latest business trends and best practices
- News about legislation and regulation impacting business
- Business how-to articles from industry experts
- Commentary and interviews with newsmakers in business and politics
Where does innovation come from? Sometimes it pops mysteriously into the head of an inventor, but often it’s the result of years of effort by teams of people in laboratories and workshops. Even if a good idea is born from a flash of insight, time, effort and money have to be invested to transform that idea into a product or service that someone wants to buy. Research and development (R&D) is needed to make an idea real.
According to the Economist, the private sector has been replacing the government as the primary source of R&D. As of 2009, as a share of GDP, the private sector spends twice as much as the government. From a global perspective, the U.S. is one of the top investors in R&D, but has fallen behind a surging South Korea.
Since 1981, the federal government has encouraged private sector investment with an R&D tax credit. From the Economist chart, we see the divergence of government and private sector R&D spending at that time. While it’s been treated as a temporary tax credit—only the government would think that something that’s 30-years-old is “temporary”—Congress has renewed it more than a dozen times until last year when it expired. This is a threat to American innovation and the jobs fueled by it.
In a 2011 report, Ernst & Young estimated that the R&D tax credit increased “annual private research spending by $9.9 billion in the short-run and $22.2 billion in the long-term.” In addition, it increased high-skilled, research-related jobs by 90,000 in the short-term and 200,000 in the long-term.
For 30 years, the federal government has encouraged the private sector to lead on R&D investment, and it’s been shown that the R&D tax credit incentivizes this investment. R&D means more innovation which means jobs. Restoring the R&D tax credit should be a slam-dunk, pro-growth no-brainer for Congress.