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The Atlanta Fed's macroblog provides commentary on economic topics including monetary policy, macroeconomic developments, financial issues and Southeast regional trends.

Authors for macroblog are Dave Altig and other Atlanta Fed economists.


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September 26, 2013


The New Normal? Slower R&D Spending

In case you need more to worry about, try this: the pace of research and development (R&D) spending has slowed. The National Science Foundation defines R&D as “creative work undertaken on a systematic basis in order to increase the stock of knowledge” and application of this knowledge toward new applications. (The Bureau of Economic Analysis (BEA) used to treat R&D as an intermediate input in current production. But the latest benchmark revision of the national accounts recorded R&D spending as business investment expenditure. See here for an interesting implication of this change.)

The following chart shows the BEA data on total real private R&D investment spending (purchased or performed on own-account) over the last 50 years, on a year-over-year percent change basis. (For a snapshot of R&D spending across states in 2007, see here.)

Real Spending on Research and Development


Notice the unusually slow pace of R&D spending in recent years. The 50-year average is 4.6 percent. The average over the last 5 years is 1.1 percent. This slower pace of spending has potentially important implications for overall productivity growth, which has also been below historic norms in recent years.

R&D spending is often cited as an important source of productivity growth within a firm, especially in terms of product innovation. But R&D is also an inherently risky endeavor, since the outcome is quite uncertain. So to the extent that economic and policy uncertainty has helped make businesses more cautious in recent years, a slow pace of R&D spending is not surprising. On top of that, the federal funding of R&D activity remains under significant budget pressure. See, for example, here.

So you can add R&D spending to the list of things that seem to be moving more slowly than normal. Or should we think of it as normal?

Photo of John RobertsonBy John Robertson, vice president and senior economist in the Atlanta Fed’s research department


September 26, 2013 in Business Cycles, Capital and Investment, Productivity | Permalink

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Comments

As someone who has spent many years in corporate R&D, I think I would advise some caution in interpreting these numbers. My experience is that an enormous amount of corporate R&D spending is simply wasted, essentially through poor management (alternatively just the fact that managing R&D from ideation through to product creation and monetization is really a very difficult task).

So it's possible that a gradual fall in overall R&D expenditure, especially relative to its natural variability, could actually reflect a healthy re-balancing of corporate spending, either through improved research productivity or through a shift towards more product-oriented expenditures. Without a lot more analysis it's difficult to really assess what's going on here.

Posted by: Mark Thomson (@markmthomson) | September 26, 2013 at 05:43 PM

Do these data include expenditures at universities? Maybe it's a low share. But as a public good every state has an incentive to let someone else provide elite higher education (as they're the most mobile geographically) and R&D.

Posted by: mike smitka | October 03, 2013 at 02:03 PM

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