Big U.S. technology and pharmaceutical companies have been pouring billions of dollars into research and development this year, driving up private-sector investments in intellectual property at the fastest pace in 12 years, according to government and corporate data.
The U.S. economy has been suffering from a lack of big ideas for years, so the surge in R&D spending this year is a welcome sign that corporations might finally be putting enough money into new ideas to move the dial on productivity growth, which has been lagging badly.
But we’ve seen similar R&D spikes before that quickly reverted to the mean.
Corporate data show that the 215 S&P 500 SPX, -0.17% companies that reported their R&D investments on a quarterly basis have increased them by more than $19 billion to $140 billion in the first half of 2018 compared with the same period a year earlier, according to data from FactSet compiled by my colleague Philip van Doorn. That’s an annualized growth rate of about 33%.
Separate government data show that private-sector investments in intellectual property (a broader category than just R&D) have grown at an 11.1% annual rate so far this year to $893 billion, contributing about 0.5 percentage point to the 3.1% annualized economic growth rate, their biggest contribution since 1999, according to the Bureau of Economic Analysis.
Private investments in intellectual property have been quite volatile over the past 20 years.That’s a larger contribution to first-half growth than was made by investments either in equipment or in structures.
Of course, a two-quarter trend is hardly a definitive sign that businesses have permanently ramped up their investments in intellectual property such as R&D, software and artistic originals. Still, it’s probably the least-known piece of good news on the economy.
Could the recent corporate tax cuts have something to do with the spike in R&D? Sure, it’s possible; we’ll have to wait to see if the increase continues in coming years, or whether the spike fades away as it has always done over the past 20 years.
Most of these companies have plenty of cash on hand, so availability of capital hasn’t been what’s holding them back. Reacting to market opportunities is the biggest reason companies invest in R&D, not the cost of capital. But the tax cut might also be accelerating some R&D, because the law will require amortization of R&D beginning in 2022.
Information technology, pharmaceuticalsIt won’t surprise anyone that information technology and pharmaceuticals dominate the industries plowing the most back into R&D.
Of the S&P 500 companies reporting R&D quarterly, here are the top spenders over their last two quarters: Amazon AMZN, -0.10% Alphabet GOOG, -0.16% Microsoft MSFT, +0.47% Apple AAPL, +0.20% Intel INTC, -0.15% , Merck MRK, -0.10% Johnson & Johnson JNJ, +0.37% Facebook FB, -0.43% Bristol-Myers-Squibb BMY, -0.79% Pfizer PFE, +0.31% Celgene CELG, -0.88% Cisco Systems CSCO, +0.07% Oracle ORCL, +0.33% Qualcomm QCOM, +0.03% and IBM IBM, +0.09% .
Each of these companies has invested more than $2.5 billion in the previous two quarters. In large part, they are trying to maximize their market share for fast-growing technologies, such as cloud computing, artificial intelligence and new drugs.
Note that Amazon doesn’t report “research and development” but a somewhat broader category: “technology and content,” which includes some spending on equipment, property, software and artistic content.
What’s missing from this list? Investments by auto makers, aerospace, other industrial companies, energy, materials and chemicals. A lot of the investments that are expected to transform our economy and our world in the next few decades — self-driving vehicles, robotics, renewable energy, nanotechnology — aren’t being made primarily by the companies that report quarterly numbers.
Fortunately, some companies with very large R&D budgets — including Ford F, -0.62% General Motors GM, -1.27% General Electric GE, +0.56% DowDuPont DWDP, -0.95% Procter & Gamble PG, -0.18% AT&T T, -0.58% Honeywell HON, +1.14% Lockheed Martin LMT, -0.59% and Exxon Mobil XOM, -1.10% — are investing in these areas. We just won’t know how much they’ve invested until they file their annual reports.
Why R&D mattersWhy does R&D matter? Because the research we do today provides the breakthroughs that will lead to the amazing goods and services of tomorrow. High levels of R&D are associated with higher productivity growth, which is the missing ingredient that has limited U.S. potential economic growth to the 2% range, rather than being able to grow at 3% or more.
Globally, the United States invests more in R&D than any other country, more than $550 billion a year, about 25% of the global total. But China and other Asian economies are catching up quickly, with growth rates about twice as high. R&D Magazine predicted in March that global R&D would rise 4.1% in 2018. U.S. investments so far this year seem to be exceeding its forecast.
Unfortunately, R&D dollars don’t go nearly as far as they used to; we’re getting less bang for every buck. It takes more hours of research to produce a patent, for instance. There’s a kind of reverse Moore’s Law in place. Indeed, one study found that it takes 18 times as many research hours today to double the density of computer chips than it took in the early 1970s.
Some have theorized that good ideas are harder to find. We’ve been dipping into the same “pool of ideas” since the 1980s. Most of the good ideas have been commercialized.
As a society, ideally we’d be investing two to four times as much as we do in R&D in order to maximize society-wide welfare, according to economists at Stanford University and MIT.
But the private-sector under-invests in R&D, because companies cannot capture the full social benefits of new ideas and technologies they develop. Some of the knowledge “spills” over and benefits competitors and the general public. That’s why R&D is considered, in part, a “public good.”
Government puts a lot of money into basic research, whereas businesses tend to fund late-stage development that can be quickly commercialized. However, federal funding for research hasn’t kept pace with the growth in the economy; in the past 10 years, federal R&D investments have risen just 0.3% per year after adjusting for inflation.
The spike in private R&D spending so far this year is a piece of welcome news, but it’s not enough.
To boost standards of living and labor productivity, we need a lot more than research into cloud computing and the development of expensive new drugs that will help a relatively small number of patients. Above all, we need to ensure the transformative products and services of the future will benefit the economy broadly — and don’t just contribute further to the concentration of industry and inequality of income and wealth.
