Economic & Business Focus: Competitive Disadvantage

CFOs of U.S.-based companies are looking abroad for cost-effective R&D.

Innovation drives growth, and R&D drives innovation, but at a time when executives are looking for the next business revolution to boost revenues, U.S. corporate R&D budgets are under pressure from all sides. Shareholders are scrutinizing spending, the federal government is shifting subsidies, and labor costs for R&D are rising. These forces are reshaping R&D work in the United States and abroad.

U.S. corporate R&D spending rose only 1.9 percent this year, the fourth year out of the past five in which spending has actually decreased in constant dollar terms, according to Battelle, a global science and technology services company. The $190.9 billion budgeted by companies for U.S. R&D in 2005 is 6 percent less than the amount spent in 2000. Federal R&D spending increased 5.6 percent for 2005, but the Bush administration shifted huge portions of the budget to military projects, leaving basic research underfunded. In addition, the number of scientists and engineers that enter the U.S. workforce each year continues to decline, driving up labor costs for R&D talent.

While these unfavorable conditions intensify in the United States, foreign corporations and governments are boosting their R&D budgets, and European and Pacific Rim universities are pumping out scientists and engineers who are capable of performing the most advanced R&D work at one-third to one-fifth of the cost. As U.S.-based CFOs scramble to fund R&D here, they are also increasingly transforming R&D into a global operation. Labor accounts for a hefty 40 percent to 85 percent of R&D costs, so companies are taking a flexible approach to locating the work.